Refuse to Resource
SE T TING A NEW STANDARD FOR MEDICAL WASTE MANAGEMENT
2 0 1 0 A N N U A L R E P O R T
SHARPS COMPLIANCE CORP.
NASDAQ (SMED)
Headquartered in Houston, Texas, Sharps Compliance is a leading full-service provider of
cost-eff ective management solutions for medical waste and unused dispensed medications
generated outside the hospital and large healthcare facility setting. Its strategy is to capture a
large part of the estimated $2 billion untapped market for used syringes and unused medical
waste outside of hospital and large healthcare settings by targeting the major agencies that
are interrelated with this medical waste stream; that is, the U.S. government, pharmaceutical
manufacturers, home healthcare providers, retail pharmacies and clinics, and the professional
market comprised of physician, dentist and veterinary practices. As a fully integrated medical
waste management company providing customer solutions and services, the Company’s solid
business model, which provides strong margins and signifi cant operating leverage, combined
with its early penetration into emerging markets, uniquely positions it for strong future growth.
The Company’s fl agship product, the Sharps® Recovery System™ (formerly Sharps Disposal
by Mail System®), is a cost-eff ective and easy-to-use solution to dispose of medical waste such
as hypodermic needles, lancets and any other medical device or objects used to puncture
or lacerate the skin (referred to as “sharps”). Its other products include the Sharps® MWMS™
(Medical Waste Management System), a comprehensive medical waste and dispensed unused
medication solution designed for emergency preparedness programs. Sharps also off ers vendor-
managed inventory programs and Patient Support Programs which incorporate the Company’s
SharpsTracer™ system.
Its RxTakeAway™ System is designed for individual consumers, retail or mail-order pharmacies,
communities and facilities including assisted living, long-term care and correction operations to
facilitate the proper disposal of unused dispensed medications.
More information on Sharps Compliance and its products can be found on its website at:
www.sharpsinc.com.
2010 F INANC IAL HIGHL IGHTS
(in thousands, except employee and per share data)
2010
2009
2008
2007
2006
Performance
Revenue
Revenue Growth
Gross Profi t
Gross Margin
Selling, General and Administrative
Operating Income (Loss)
Operating Margin
Net Income
Diluted Earnings Per Share
Weighted Average Shares Outstanding–Diluted
Year–End Financial Position
Cash and Cash Equivalents
Total Assets
Long-term Debt
Shareholders’ Equity
Other Year–End Data
Depreciation and Amortization
Number of Employees
$ 39,156
$
20,297
$ 12,841
$ 11,956
$ 10,563
92.9 %
58.1 %
7.4 %
13.2 %
17.4 %
$ 23,654
$ 10,456
$
5,070
$
5,013
$
4,494
60.4 %
$
8,815
$ 14,398
36.8 %
$
$
9,356
0.63
14,952
$
$
$
$
51.5 %
6,604
3,464
17.1 %
4,197
0.30
13,996
$ 18,068
$
4,792
$ 31,632
$ 15,188
$
-
$ 26,941
$
$
-
9,570
39.5 %
4,851
(1 )
0.0 %
82
0.01
13,540
2,035
5,676
-
2,886
$
$
$
$
$
$
$
$
41.9 %
4,084
727
6.1 %
785
0.06
12,338
2,134
4,691
-
2,169
$
$
$
$
$
$
$
$
$
796
67
$
418
$
266
$
203
43
33
33
$
$
$
$
$
$
$
$
$
42.5 %
3,958
382
3.6 %
382
0.03
10,954
297
2,190
-
252
154
28
Seven-Year
Evolution of
Sharps Markets
(cid:81)(cid:81) GOVERNMENT
(cid:81)(cid:81) HOME HEALTHCARE
(cid:81)(cid:81) RETAIL
(cid:81)(cid:81) PROFESSIONAL
(cid:81)(cid:81) HOSPITALITY
(cid:81)(cid:81) PHARMACEUTICAL
(cid:81)(cid:81) OTHER
2004
0%
80.7%
0.5%
3.5%
3.4%
0%
11.9%
2010
60.4%
16.6%
11.0%
4.2%
2.6%
1.9%
3.3%
2004 MARKETS
[BILLINGS $8.6 MILLION]
2010 MARKETS
[BILLINGS $39.4 MILLION]
L E T T E R F R O M T H E C H A I R M A N
Dear Stockholders:
We had another resoundingly successful year in fi scal
2010. We expanded our capabilities, enhanced our
solutions off erings, diversifi ed and tapped into new
and promising markets and continued our focus on
innovation, which has been and will continue to be
the foundation of our culture.
Our commitment to managing with a long-term
view is shaped by goals that refl ect our fi nancial,
social and environmental responsibilities. We believe
that we can aff ect the environment in a positive way.
With that mindset, we introduced a groundbreaking
solution in fi scal 2010, the patent-pending Waste
Conversion Process™.
This transformational process completely eliminates the
medical waste we process from going into landfi lls as it transforms
the waste into a new product called PELLA-DRX™, which is a clean, raw
material used in the manufacture of industrial resources, such as cement.
By repurposing medical waste, we reduce the environmental footprint of our
customers and ourselves. And, we believe this can drive sales growth as customers
and prospects have recognized how this unique process can address their own green initiatives.
Next Chapter in Sharps History
Of all the exciting and challenging years of growth and development, the last couple have been the most exhilarating for
me. We laid the groundwork for further success and growth and continue to make solid progress on our strategies. We are
capitalizing on our experience and industry knowledge to create new solutions for our customers, strengthen our core
business and expand into new markets. I am very proud to have led this organization from just an early concept to the
thriving business it has become.
With my planned retirement, David P. Tusa, who joined Sharps in 2003 as Chief Financial Offi cer and
was promoted to President in June 2010, has recently assumed the role of Chief Executive Officer.
Diana P. Diaz joined us in June 2010 as our new Chief Financial Offi cer.
I would be remiss in not acknowledging the hard work, passion and commitment of all
our employees that have been instrumental in our success and I off er my sincere thanks. Your
creativity and inspiration will be the driving force to take the Company into the future and
continue its success story.
I have absolutely enjoyed and appreciated my time leading this Company.
With our tremendous history, talented employees, strong fi nancial position and
diverse mix of markets, we are well positioned to extend our leadership position
in the industry.
Sincerely,
Dr. Burton J. Kunik
Chairman of the Board
October 12, 2010
1
Revenue (in millions)
$40
35
30
25
20
15
10
5
0
`06
`07
`08
`09
`10
LETTER TO STOCKHOLDERS
Sharps generated solid performance in fi scal year 2010 driven by continued growth in our core
markets and the successful implementation of the $40 million U. S. Government contract
awarded in early 2009. Revenue was a record $39.2 million, an increase of 93% year-over-
year. We were encouraged with our core revenue growth of 12%, which excludes the impact of the
government contract. Operating income was $14.4 million in fi scal 2010, up 316% year-over-year and
represented 36.8% of revenue, a substantial improvement over the prior year.
We initiated a number of creative, strategic actions which we believe have set the course for appreciable
expansion and growth. Some of those notable accomplishments included:
• We further developed our Retail market as evidenced by billings growth of 124%, or $2.4 million
in fiscal 2010. We expect our Retail billings to see continued growth as a greater number
and percentage of fl u shots are being administered outside the traditional settings as a result of
increased public awareness, convenience and retail store marketing. We believe we have an
approximate 75% market share in the retail pharmacy and clinic fl u shot administration market.
• We established a new inside sales force specifi cally to target, educate and sell to the Professional
market, which includes doctors, dentists and veterinarians. This market grew 55%, or
$0.6 million, in fi scal 2010 which includes the impact of not only our inside sales eff orts
but strength in our distributor network. Due to early success, we increased the
sales team to eight and expanded the markets they are targeting to include
smaller, independent home healthcare and assisted-living facilities. We
expect to continue to grow the inside sales team and could have as
many as ten to twelve reps by the end of calendar year 2010.
• We successfully launched and since expanded a pilot program
with the Department of Veterans Aff airs (“VA”), where select VA
medical centers provide the Sharps Recovery System™ and
RxTakeAway™ solutions to their patients. We have received
positive feedback and encouraging data regarding usage and
are hopeful that the program will be expanded throughout
the VA’s pharmacy services division, which provides
comprehensive care to over 5.5 million veterans each year.
Importantly, through this program we believe the VA is
establishing a standard of care that includes our solutions.
We also won programs in the states of Iowa and North Dakota,
where our RxTakeAway™ solutions are used by participating
pharmacies.
We are building for
our next phase of growth.
We added 24 employees
throughout the current fi scal
year, for a total of 67, launched
our Atlanta operations and
distribution center and
signifi cantly upgraded our
treatment facility. Our strategic
investments contributed to
net income growth of 123%
on a year-over-year basis
to reach $9.4 million in
fi scal 2010.
2
• We are building for our next phase of growth. We added 24 employees throughout the current
Operating Income (in millions)
fi scal year, for a total of 67, launched our Atlanta operations and distribution center and signifi cantly
upgraded our treatment facility. Our strategic investments contributed to net income growth of
123% on a year-over-year basis to reach $9.4 million in fi scal 2010.
• We rebranded our solutions off erings with the launch of our new patent-pending PELLA-DRX™
Waste Conversion Process™. Our fl agship product, Sharps Disposal by Mail System® was renamed
Sharps Recovery System™, which better refl ects the value of recovering and repurposing medical
waste.
• We completed a common stock off ering in December 2009. Net proceeds of $4.8 million from
the off ering, and the positive cash fl ow we generated during the year was used to further strengthen
our balance sheet while maintaining our business strategy and continuing to invest in our long-
term vision. Our cash position increased to $18.1 million from $4.8 million at the end of fi scal 2009,
stockholders’ equity jumped more than 180% to $26.9 million and we ended the year with
zero debt.
• We partnered with a leading hazardous waste solutions provider to off er customers a single source
for addressing disposal of medical waste, unused medications and hazardous waste.
Positioned for the Future
We have great confi dence in the long-term strength of our business model and the magnitude of
the potential market we can address. In order to focus resources and capture market share, we target
opportunities that will provide the greatest near-term return and enable us to extend our leadership
position in the markets we serve.
Recognition for the need to develop regulation for the proper disposal of sharps and unused
medications outside the hospital and large healthcare facility environment combined with the ever-
needed eff orts to reduce the amount of waste that goes into landfi lls spur the markets’ acknowledgement
of the value of our solutions. We have a robust organization with the resourcefulness to succeed and
we see signifi cant opportunities on the horizon. I am honored to lead Sharps at this exciting point in
our history.
Thank you for your interest and investment in Sharps Compliance.
Sincerely,
David P. Tusa
Chief Executive Offi cer and President
October 12, 2010
$15
12
9
6
3
0
$0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
$30
25
20
15
10
5
0
`06
`07
`08
`09
`10
Diluted EPS
`06
`07
`08
`09
`10
Shareholders’ Equity (in millions)
`06
`07
`08
`09
`10
3
Sharps®MWMS™
Every year an estimated 3 billion used syringes are disposed of
outside of the hospital setting, and an estimated 200 million pounds
of dispensed medications go unused.
Sharps®MWMS™ Medical Waste Management System is a com-
prehensive medical waste and unused medication management
solution that includes an array of services and products to collect,
store and dispose of medical waste and unused medications.
It incorporates Sharps Recovery System™ products and the RxTakeAway™
Environmental Return System products along with warehousing,
inventory management, training, data management and other
services.
Capable of rapid deployment in the event of emergency,
Sharps®MWMS™ is increasingly recognized as an integral part
of governmental and commercial emergency
preparedness programs.
Business Drivers
Factors energizing our bottom-line success
RxTakeAway™
Approximately 4 billion
prescriptions are written every year
in the United States. As many as 40% of
the dispensed medications go unused and are
subject to misuse or improper disposal, threaten-
ing our rivers, streams and municipal water systems.
Growing awareness over the dangers of improper
disposal of unused medications is fueling the demand for
comprehensive solutions such as our RxTakeAway™.
Designed for individuals, assisted-living facilities, government
agencies, pharmacies and others, this solution consists of systems
that range in capacity from a USPS-approved special-use envelope
to 10- and 20-gallon containers. All include pre-paid return
packaging for treatment, tracking and reporting at our facility.
RxTakeAway™ is a secure, turnkey solution that prevents prescription
and over-the-counter drug misuse while protecting our water
supply and the environment.
The Company recently introduced a proprietary tracking system,
DrugTracer™, to document unused patient medications.
4
Sharps Disposal Legislation for Self-Injectors
Increasing Regulation
Public health issues surrounding blood-borne infectious
diseases, home-generated sharps, medical waste and unused
medications are prompting legislators at all levels of government
to take action. Recently the EPA and the California Senate have
issued guidelines for self-injectors. Iowa and North Dakota
have taken the lead with state funded programs to properly
dispose unused medication. Legislative momentum at the city,
state and federal level will continue to drive demand for the
Company’s collection, tracking and disposal solutions.
Unused Medication Disposal Legislation
Legislation enacted
Legislation introduced
Guidance
No legislation introduced
Growth Markets
Retail We continue to be the leader in
managing medical waste for retail clinics and
expect another year of strong growth as more
vaccinations are administered in grocery and drug
stores as well as retail-based non-emergency clinics.
Factors driving growth include heightened fl u concerns,
the convenience of the retail setting for patients, and the
increased store traffi c for retailers.
Professional Our recent revenue growth in this segment was
the result of our inside call center’s targeted marketing activities
Government A pilot program with the VA in many states is proving
the value of the Company’s medical waste and unused medication
to offi ces that generate small quantities of medical waste. The
disposal solutions. Meanwhile, an agreement with the Iowa Pharmacy
sales team was successful in educating doctors, dentists and
Association is providing our RxTakeAway™ products to more than
veterinarians about the cost advantages of our medical waste
300 pharmacies. These and other programs are demonstrating the
recovery system compared to traditional pick-up services.
benefi ts of our solutions to government agencies at all levels.
5
Repurposing
Transforming the Future of Medical Waste Management
In 2010, Sharps Compliance introduced a patent-pending process that
repurposes medical waste materials, once destined for landfills, into a
useful industrial resource. The process is a major leap forward for the entire
industry and sets a new standard for the environmentally responsible
treatment of medical waste.
This fi rst-of-its-kind Waste Conversion Process™
medical waste was ultimately disposed of in
transforms needles, syringes, lancets and other
landfi lls, it created environmental challenges and
medical waste collected by Sharps Compliance
potential liabilities for future generations.
into a new product called PELLA-DRX™ – a safe,
Sharps’ new Waste Conversion Process™ reduces
clean material designed for use in the manufacture
the Company’s use of landfi lls for medical waste
of cement and other industrial resources.
to zero. The process removes all hazards from the
In the past, traditional disposal methods pre-
waste and converts it into a valuable raw material
sented signifi cant concerns for society.
that is as sterile as sterilized surgical instruments.
Because the vast majority of
With this groundbreaking, green initiative,
Sharps Compliance leads the medical waste
management industry. Medical waste can now
become a sustainable product and even a potential
revenue stream for the Company as a raw
material used in the construction of everything
from homes to highways to high-rise buildings.
6
6
SEC FORM 10-K
(This page intentionally left blank)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2010
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-34269
SHARPS COMPLIANCE CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
9220 Kirby Drive, Suite 500, Houston, Texas
(Address of principal executive offices)
74-2657168
(I.R.S. Employer
Identification No.)
77054
(Zip Code)
Registrant’s telephone number, including area code (713) 432-0300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Shares, $0.01 Par Value
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act. Yes
No
Indicate by check mark whether 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 of this
chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Smaller reporting company X
Accelerated filer
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
As of December 31, 2009, the aggregate market value of the Registrant’s Common Stock held by non-affiliates was
approximately $101.3 million (based on the closing price of $9.60 on December 31, 2009 as reported by The NASDAQ
Capital Market.
The number of common shares outstanding of the Registrant was 14,907,091 as of August 24, 2010.
DOCUMENTS INCORPORATED BY REFERENCE:
(1)
Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on November 18, 2010
are incorporated by reference into Part III.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS *
ANNUAL REPORT ON FORM 10-K
________________________________________________________________________________
PART I
Page
Item 1 Description of Business ......................................................................................... 2
Item 1A Risk Factors ........................................................................................................... 11
Item 1B Unresolved Staff Comments .................................................................................. 14
Item 2 Description of Property .......................................................................................... 14
Item 3 Legal Proceedings .................................................................................................. 14
Item 4 Removed and Reserved
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities .......................................................... 15
Item 6 Selected Financial Data .......................................................................................... 16
Item 7 Management’s Discussion and Analysis of Financial Condition and
Results of Operations ......................................................................................... 16
Item 7A Quantitative and Qualitative Disclosures About Market Risk ............................... 25
Item 8 Financial Statements .............................................................................................. 26
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................................................................... 26
Item 9A Controls and Procedures ........................................................................................ 26
Item 9B Other Information ................................................................................................... 27
PART III
Item 10 Directors, Executive Officers and Corporate Governance ...................................... 27
Item 11 Executive Compensation ....................................................................................... 28
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters .............................................................................. 28
Item 13 Certain Relationships and Related Transactions and Director
Independence ..................................................................................................... 28
Item 14 Principal Accountant Fees and Services ................................................................ 28
PART IV
Item 15 Exhibits and Financial Statement Schedules .......................................................... 28
Signatures .............................................................................................................. 32
____________
* This Table of Contents is inserted for convenience of reference only and is not
a part of this Report as filed.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain forward-looking statements and information relating to the Company and
its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information
currently available to the Company’s management. When used in this report, the words “anticipate”, “believe”, “expect”,
“estimate”, “project” and “intend” and words or phrases of similar import, as they relate to the Company or its
subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors, including without limitations, competitive factors,
general economic conditions, customer relations, relationships with vendors, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein. Based upon changing conditions, should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
PART I
Sharps Compliance Corp. was formed in November 1992 as a Delaware corporation. The information presented herein is for
Sharps Compliance Corp. and its wholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance,
Inc.), Sharps e-Tools.com, Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc., Sharps Environmental Services, Inc. (dba
Sharps Environmental Services of Texas, Inc.) and Sharps Safety, Inc. (collectively, “Sharps” or the “Company”). Unless
the context otherwise requires, “Company”, “we”, “us”, and “our” refer to Sharps Compliance Corp. and its subsidiaries.
The Company provides access to all of its filings with the Securities and Exchange Commission (“SEC”) through its website
www.sharpsinc.com, as soon as reasonably practicable after the reports are filed with the SEC. The filings are also available
via the SEC’s website at www.sec.gov/edgar/searchedgar/companysearch.html.
COMPANY OVERVIEW
The Company is a leading full-service provider of cost-effective solutions for management of medical waste and unused
dispensed medications generated outside of the hospital and large health care facility setting, serving more than 4,000
customers in all 50 states. Our solutions facilitate the proper treatment of numerous types of medical waste and unused
dispensed medications, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the
skin, or sharps, and unused dispensed prescription and over-the-counter drugs and medications. We serve customers in
multiple markets such as government (federal, state and local), home health care, retail clinics and immunizing pharmacies,
pharmaceutical manufacturers, professional offices (physicians, dentists and veterinarians), hospitality (including assisted
living facilities, hotels, motels and restaurants), consumers, commercial, industrial and agriculture, and distributors to many
of the aforementioned markets. We assist our customers in determining which of our distinct solution offerings best fit their
needs for the collection, storage, return transportation and treatment of their or their patients’ medical waste and unused
dispensed medications. Our differentiated approach provides our customers the flexibility to return and ultimately properly
treat their or their patients’ medical waste or unused dispensed medications through pre-paid mail services primarily through
the United States Postal Service (“USPS”).We believe our easy-to-use and convenient solutions are on average up to 50%
less than traditional pick-up services for treatment of medical waste outside of the hospital or large health care facility
setting. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex
medical waste disposal and unused dispensed patient medication compliance requirements. The Company’s fully-integrated
operations are a key factor leading to its success and continued growth. Since 2008, our revenue growth has accelerated
significantly, increasing from $12.8 million for the fiscal year ended June 30, 2008 to $20.3 million for the fiscal year ended
June 30, 2009, representing a year-over-year growth rate of 58.1%. Revenues for the fiscal year ended June 30, 2010 were
$39.2 million, up 92.9% from the prior year.
In February 2009, we signed a five year contract (one year , plus four option years) with a major U.S. government agency for
a $40 million program to provide our comprehensive Medical Waste Management System™, or Sharps®MWMSTM, which
is a rapid-deployment solution offering designed to provide medical waste collection, storage and treatment in the event of
2
natural disasters, pandemics, man-made disasters, or other national emergencies. Sharps®MWMSTM is unique in that the
solution also offers warehousing, inventory management, training, data and other services necessary to provide a
comprehensive solution. The Company received a purchase order for $28.5 million ($6.0 million of which was recognized in
fiscal year 2009, and $22.5 million was recognized in the first half of fiscal year 2010). In January 2010, Sharps was
awarded the first option year (ending January 31, 2011) valued at approximately $1.6 million and is expected be recognized
from February 1, 2010 through January 31, 2011. There is expected to be approximately $1.6 million in revenue in calendar
2010 for the maintenance component of the contract including $0.8 million in the second half of calendar year 2010. The
remaining three option years are expected to be approximately $3.0 million per contract year. Although, the Company
believes the amounts above to be reasonable based upon the underlying contract and its current project plan, it makes no
assurances regarding the actual recognition of revenue by fiscal year, which could vary significantly from that noted above.
The successful launch of this program demonstrates the attractiveness of our integrated, full-service system that enables
government agencies and commercial organizations to completely outsource the planning and execution of their emergency
preparedness and disaster relief planning as it relates to medical waste handling and rapid response capabilities. In addition
to the Sharps®MWMSTM, we continue to add similar full-service, patient support programs with major pharmaceutical
manufacturers whereby we provide a customized Sharps® Recovery System™ (formerly Sharps Disposal by Mail System®)
along with fulfillment, inventory management, storage and data services, as well as provide critical patient usage data that
assists the manufacturers in assessing drug effectiveness and compliance.
The Centers for Disease Control and Prevention (“CDC”), and the United States Environmental Protection Agency (“EPA”),
estimate that there are over three billion used syringes disposed of annually outside of the hospital setting in the United
States. In addition, industry experts estimate that as much as 40% of dispensed medications outside of the hospital setting in
the United States goes unused, generating an estimated 200 million pounds of pharmaceuticals potentially polluting our
environment and placing our citizens at risk for accidental poisonings. We estimate the market for our solutions (outside of
the hospital and large health care facilities) to be over $1 billion per year for medical waste disposal and over $1 billion for
the proper disposal of unused dispensed medications.
We believe that demand for our cost-effective medical waste management solutions has been increasing due to several
factors. First, communities, consumers, government and health care and commercial organizations are increasingly
becoming aware of the need to properly treat medical waste and unused dispensed medication as federal and state regulatory
bodies continue to provide guidance and enact legislation which mandate the proper disposal of medical waste outside the
hospital setting to protect the general public and workers from potential exposure to contagious diseases and health and
safety risks. Second, there is heightened public awareness and growing demand for influenza vaccines that are driving
demand for our solutions both in the short-term to address immediate flu shot needs and in the long-term as the public
increasingly obtains its immunizations from retail locations and clinics. Finally, we believe that customers in many of the
sectors we serve, such as physicians, dentists, veterinarians, clinics and assisted living facilities, are becoming aware of
alternatives to the traditional medical waste pick-up service and the lower cost (estimated average savings of up to 50%) and
convenience associated with the Sharps® Recovery System™ (formerly Sharps Disposal By Mail System®).
The patent-pending GREEN Waste Conversion Process™, announced by the Company in April 2010, eliminates medical
waste processed for the Company’s customers from going into landfills. The process transforms treated medical waste into a
new product called PELLA-DRX™ - a clean, raw material used in the manufacture of industrial resource. Treatment of
medical waste has presented major concerns for American society as the vast majority of medical waste is ultimately
disposed of in landfills, creating massive liabilities for future generations. The Sharps Waste Conversion Process™ creates a
sustainable product and a much needed GREEN method to treat medical waste while creating a useable, safe, and clean raw
material. We believe PELLA-DRX™ is ideally suited for energy intensive industries like cement, lime, steel, and power
plants.
Our principal executive offices are located at 9220 Kirby Drive, Suite 500, Houston, Texas. Our telephone number at that
location is (713) 432-0300. We currently have 67 employees, of which 65 were full time employees. We have
manufacturing, assembly, distribution and warehousing operations and our corporate offices in Houston, Texas. We maintain
a warehouse facility in College Park, Georgia. We own and operate a facility in Carthage, Texas that houses our processing
and treatment operations. The Company is committed to mitigating the effects of medical waste and unused dispensed
medications on the environment and our citizens through our environmentally conscious treatment process. We have
supplemented our incinerator at this facility with an autoclave system. Autoclaving is a process that treats medical waste with
steam at high temperature and pressure to kill pathogens, and is a cost-effective alternative to traditional incineration. The
autoclave system is utilized alongside the incinerator for day-to-day operations. We believe that our facility is one of only
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ten permitted commercial facilities in the United States capable of treating all types of medical waste and unused dispensed
medications.
SOLUTIONS OVERVIEW
We offer a broad line of product and service solutions to manage the medical waste and unused dispensed medications
generated by our customers. Our primary solutions include the following:
Sharps® Recovery System™ (formerly Sharps Disposal by Mail System)®: a comprehensive solution for the containment,
transportation, treatment and tracking of medical waste generated outside the hospital and large health care facility setting.
The Sharps® Recovery System™ includes a securely sealed, leak and puncture resistant sharps container in several sizes
ranging from one quart to eighteen gallons; USPS approved shipping carton with pre-paid priority mail postage; absorbent
material inside the container that can safely hold up to 150 milliliters of fluids; a red bag for additional containment; and
complete documentation and tracking manifest. The Sharps® Recovery System™ is transported to our facility for treatment.
Upon treatment or conversion of the waste, we provide electronic proof of receipt and treatment documentation to the
customer through our proprietary SharpsTracerTM system.
RxTakeAway™ System: a comprehensive solution that facilitates the proper disposal or treatment of unused dispensed
medications and includes the TakeAway™ Environmental Return System and the RxTakeAway™ Recovery and Reporting
System . The solution provides a means for individual consumers, communities and facilities, such as pharmacies, assisted
living facilities, long-term care facilities, mail-order pharmacies and correctional operations, to manage their unused
dispensed medications (other than controlled substances) and consists of customized containment, transportation, destruction
or conversion and tracking services. Our proprietary tracking system, MedsTracerTM, is designed for tracking unused
dispensed medications, which assists pharmaceutical manufacturers in monitoring drug usage and provides critical data for
patient management and compliance. Our proprietary tracking system is a highly value-added component of our solution as
it enhances pharmaceutical manufacturers’ ability to monitor patient drug usage.
Sharps®MWMSTM: a comprehensive solution designed for rapid deployment in emergency situations and features the
Sharps® Recovery System™ and TakeAway™ Environmental Return System products combined with warehousing,
inventory management, training, data and other services. Sharps®MWMSTM is designed to be an integral part of
governmental and commercial emergency preparedness programs for large scale or catastrophic situations such as natural
disasters, pandemics, terrorist events, or other national emergencies. Also available with the Sharps®MWMSTM is the
Sharps® Rx Recovery and Reporting System, which delivers a turn-key approach to the collection, storage, audit, treatment
and documentation of unused dispensed medications. The Medical Waste Management SystemTM can be used in virtually
any location where patients may be treated or shots administered. This system is designed to be portable, allowing medical
waste to be collected where it is generated, properly stored, and transported with no special pick-up arrangements.
SharpsTracer™: a comprehensive solution that provides customers with an electronic record of receipt and treatment of
their waste to meet regulatory requirements. SharpsTracer™ eliminates the need for traditional paper-based methods of
tracking and is designed to enhance customer efficiencies with an automatic evidence of proof of receipt and treatment and
market data capabilities. This cost-effective and regulatory compliant tracking and documentation system is an important
part of our full-service and comprehensive suite of solutions.
Other Solutions: a wide variety of other logistical products solutions including Pitch-ItTM IV Poles, Trip LesSystem®,
Sharps® Pump and Asset Return Box, Sharps Secure® Needle Recovery System, Sharps SureTemp Tote®, IsoWash®
Linen Recovery System, Biohazard Spill Clean-Up Kit and Disposal System and Sharps Environmental Services.
MARKET OVERVIEW
The CDC and the EPA estimate that there are over three billion used syringes disposed of annually in the United States
outside of the hospital setting. We estimate that it would require 30 to 50 million Sharps® Recovery System™ (formerly
Sharps Disposal by Mail System®) products to properly dispose of all such syringes, which would equate to a market
opportunity of over $1 billion. We estimate that we have penetrated approximately 1% of this market. Additionally, we
believe that there has been and will continue to be a significant increase in self-injectable medications utilized by patients,
further increasing the number of syringes used and disposed of in the United States.
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Industry experts estimate that approximately 40% of the dispensed medication from four billion annual prescriptions in the
United States goes unused, resulting in over 200 million pounds of pharmaceuticals which can adversely affect the
environment if disposed of improperly. Most unused dispensed medications are either (i) disposed of untreated in the
garbage or flushed down the toilet, ending up in landfills and polluting rivers and water supply systems, lakes and streams
with trace amounts of unused dispensed medications or (ii) stored in medicine cabinets that are accessible to children and
teenagers. Improperly disposed of or diverted unused dispensed medications have been shown to increase the risk of
accidental poisoning of citizens, including children and teenagers. The Company has estimated that the market for the
proper disposal of unused dispensed medications outside the hospital setting is over $1 billion.
We continue to take advantage of the many opportunities in our markets served as communities, consumers, governments
and industries become more aware of the need for the proper disposal of medical sharps and unused dispensed medications.
There have been several key events that have contributed to this education process, including:
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in December 2004, the EPA issued its new guidelines for the proper disposal of medical sharps, revising
the previous guidance that advised patients to dispose of used syringes in the trash;
in July 2006, the states of California and Massachusetts passed legislation designed to mandate appropriate
disposal of sharps waste necessary to protect the general public and workers from potential exposure to
contagious diseases and health and safety risks;
beginning September 1, 2008, California’s legislation regulating sharps disposal became effective and
began to be enforced, making it illegal to dispose of used sharps through the normal garbage disposal
system. Other states, such as Massachusetts and Louisiana, have enacted similar measures that became
effective in 2008 and 2009, respectively. Currently, nine states ban the disposal of used syringes in the
trash and four states are considering or have introduced similar legislation, while the remaining states
operate under the EPA guidance noted above. In August 2008, the United States House of Representatives
and Senate introduced bills which, if enacted, would provide for Medicare reimbursement, under part D,
for the safe and effective disposal of used needles and syringes; and
in October 2009, California passed Senate Bill 486 requiring drug companies that market and sell
prescribed medications that are routinely injected at home to submit plans to the California Integrated
Waste Management Board on or before July 1, 2010 (and annually thereafter) describing how they support
safe needle collection and disposal programs for patients using their drugs.
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In 2009 and 2010, the states of Iowa and North Dakota introduced state funded programs to properly
dispose of unused medications.
Among the methods of disposal recommended as part of the above noted regulatory actions are mail-back programs such as
the solutions we offer. We believe that other states will continue introducing similar legislation and that these developments
will drive additional demand for our solutions.
COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
Leading comprehensive provider of cost-effective medical waste management solutions.
We offer a broad line of solutions to meet the medical and pharmaceutical waste management needs of our customers.
Through partnerships with the USPS and UPS, the Company is able to offer our mail-based services at a significantly lower
cost to customers as compared to the traditional model of physical pick-up from individual locations. In contrast to route-
based service providers which generally make periodic pick-ups whether customers need them or not and charge higher
prices to cover transportation and labor expenses, our mail-based service is a convenient, on-demand, reduced cost option to
better serve our customers. Our proprietary SharpsTracer™ tracking and documentation systems provide customers a
comprehensive electronic record of receipt and treatment of their waste to meet regulatory requirements. Our Medical Waste
Management System™ provides a complete solution for customers seeking to completely outsource the management of all
5
aspects of their waste management, including warehousing, inventory management, training, and data collection in addition
to treatment services. While competitors may attempt to replicate our mail-based return services, we believe the ability to
offer such a comprehensive, value-added turnkey solution is a significant competitive advantage.
Environmentally-conscious solution provider.
In addition to providing cost-effective solutions for our customers, the Company is committed to mitigating the effects of
medical and pharmaceutical waste on the environment through our treatment processes and marketing efforts. Most used
sharps and unused dispensed medications are currently disposed of untreated in the garbage, ending up in landfills and
polluting rivers, lakes and streams with trace amounts of pharmaceuticals. Our products and services provide an
environmentally cleaner alternative process for treatment. Our GREEN Waste Conversion Process™ eliminates medical
waste processed for the Company’s customers from going into landfills. The process transforms treated medical waste into
PELLA-DRX™ - a clean, raw material used in the manufacture of industrial resource. The use of recycled paper and plastic
materials for our products further demonstrates our total commitment to environmentally sound business practices. As an
organization, the Company is a leading proponent for the development of solutions for the safe disposal of sharps and unused
dispensed medications in the community and continually work to raise public awareness of the issue.
Vertically integrated full-service operations.
Our products and services encompass the entire range of the medical waste and unused dispensed medications disposal life
cycle. We provide our customers with a wide variety of products and sizes to meet their individual needs. Various sizes of
TakeAway™ Enviornmental Return System boxes provide similar customizability for our pharmaceutical customers. Once
filled, these containers are shipped back to our treatment facility which has the capacity to process up to 40 tons of waste per
day (currently permitted to process up to 18 tons of waste per day). We carefully track the movement of each shipment from
mailing to ultimate treatment and provide confirmation to the customer for their records. By controlling all aspects of the
process internally, the Company is able to provide a one-stop solution and simplify the tracking and record-keeping
processes to meet regulatory requirements. Other products such as Pitch-ItTM IV Poles and pump return boxes meet
additional specialized needs for the home health care industry.
Well-positioned to capitalize on the growing need for government and commercial preparedness to address emergency
and disaster relief situations.
Federal and state government agencies as well as commercial organizations are increasingly focused on having programs in
place for emergency and disaster relief situations such as natural disasters (hurricanes, flooding and earthquakes), pandemics
(H1N1 flu strain), acts of terrorism (September 11th) and other national emergencies. The Sharps®MWMS™ is designed to
be an integral part of governmental and commercial emergency preparedness programs. The successful launch of our
government agency program demonstrates the attractiveness of our integrated, full-service solution that enables government
agencies and commercial organizations to completely outsource the planning and execution of their emergency preparedness
and disaster relief planning as it relates to medical waste handling and rapid response capabilities. We believe this program
will generate additional demand from other government agencies at the federal, state and local level.
Increased state and federal regulatory attention.
As the movement to increase regulation of sharps and unused dispensed medications disposal gains momentum at both the
state and federal level, we believe the Company is well positioned to benefit given our strict adherence to established
standards and extensive documentation and records. Currently, 13 states restrict or have introduced legislation to restrict the
disposal of used sharps in household trash and 11 states have also enacted or introduced legislation to regulate the disposal of
pharmaceuticals to reduce pollution of the environment. As state and federal enforcement of these statutes increases, more
companies will turn to solutions such as ours to help manage their medical waste and regulatory compliance.
Diverse product markets.
Sharps offers services and products to a wide variety of end markets. The Company’s primary end markets ranked by
revenue in fiscal year 2010 were federal, state and local government agencies (61%), home health care companies (17%),
retail pharmacies and clinics (11%), professional physician, dental and veterinary clinics (4%), pharmaceutical manufacturers
(2%), and other (5%) which includes hotel, retirement and assisted living facilities, commercial and industrial and
agriculture. The Company’s primary end markets ranked by revenue in fiscal year 2009 were home health care companies
(36%), federal, state and local government agencies (30%), retail pharmacies and clinics (9%), pharmaceutical manufacturers
(8%), professional physician, dental and veterinary clinics (5%), and other (12%) which includes hotel, retirement and
assisted living facilities, commercial and industrial and agriculture.
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Highly scalable business model.
Because of our mail-based service model, we can add new business while leveraging our existing fixed cost structure. Until
capacity limitations are reached on our incinerator and autoclave systems, our facility can accommodate significant
additional volume, incurring only variable costs of transportation, storage and processing. Once we gain a new customer, our
business typically increases as our customer grows without additional sales and marketing efforts due to the embedded nature
of our products and the ease with which we can accommodate additional volume through larger container sizes or faster
cycle times.
Experienced and accomplished management team.
Our senior management team has extensive industry experience, and is committed to the continued growth and success of our
company. Dr. Burton Kunik, our Chairman and CEO, founded Sharps Compliance, Inc., now a wholly owned subsidiary of
the Company, in 1994 and also founded two other medical waste management companies. In 2004, he was awarded the
International Sharps Injury Prevention Award. Mr. David P. Tusa, CPA, President, in addition to his seven plus years with
the Company has over 25 years of financial, accounting, business and public company experience in multiple industries and
in companies with revenues up to $500 million. Mr. Claude Dance, Senior Vice President of Sales and Marketing, has broad
health care and reverse logistics industry experience at a variety of firms including Pharmerica, Cardinal Health and Wyeth
Pharmaceuticals. Ms. Diana Diaz, CPA, MBA, Vice President and Chief Financial Officer, has over 25 years of finance,
accounting, health care and public company industry experience.
The Company’s Board of Directors oversees CEO and senior management succession planning. The process focuses on
building management depth, considers continuity and stability within the Company, and responds to Sharps’ evolving needs
and changing circumstances.
GROWTH STRATEGIES
We plan to grow our business by employing the following primary growth strategies:
Further penetrate existing customers.
Many of our customers who currently use the Sharps® Recovery System™ (formerly Sharps Disposal by Mail System®)
could also benefit from the TakeAway™ Environmental Return System products or other specialized products. Although
currently focused primarily on sharps disposal, pharmacies (including chains and mail order), assisted living facilities and
other related organizations will develop needs for our other product lines as they expand their patient service offerings. As
an entrenched and value-added supplier of treatment solutions, we believe the Company is well-positioned to capture
incremental business from our existing customers.
We believe the recent passage of new regulations, such as California Senate Bill 486, will generate the sale of additional
patient support programs with pharmaceutical manufactures as they respond to the requirements of the legislation. We have
programs in place with five pharmaceutical manufacturers and we believe the Company is the leader in providing solutions
of this type to this market.
Increase adoption of our product lines among federal, state and local government agencies.
We believe that our recent successful launch of a $40 million MWMSTM program with a major U.S. government agency is
leading to additional business from other government agencies at the federal, state and local level. In January 2010, we
launched a pilot program with the United States Department of Veterans Affairs (“VA”) within the VA Capitol Health Care
Network (“Veterans Integrated Service Network” or “VISN”). The VISN is part of the Veterans Health Administration
which encompasses the largest integrated health care system in the United States, consisting of 153 medical centers, in
addition to numerous community based outpatient clinics, community living centers and Vet Centers. Together these health
care facilities provide comprehensive care to over 5.5 million Veterans each year. The pilot allows each of the participating
medical centers within the VISN, both inpatient and outpatient, to provide the Sharps® Recovery System™ (formerly known
as the Sharps Disposal By Mail System®) and the TakeAway™ Environmental Return System solutions to their patients.
Since its original launch, the pilot program has now expanded to three other VISNs. In addition, we believe there are
additional sales opportunities with a major U.S. government agency, including additional products and services, as well as
the potential for more Medical Waste Management SystemTM orders. These successes demonstrate the attractiveness of our
integrated, full-service system that allows government agencies to completely outsource the medical waste handling aspects
of their disaster relief programs and rapid response capabilities. Once the system has been proven at the government level,
7
we expect additional growth through commercial emergency preparedness programs as well.
Enhance sales and marketing efforts.
Through the expansion of our sales force, development of additional marketing materials, increased use of trade magazine
advertising and implementation of a call center for direct marketing efforts, we believe we can drive significant additional
growth. Capitalizing on the increased regulatory attention directed at medical waste management initiatives, we have had
significant contract wins at the state government level and received significant press coverage of our new TakeAway™
Environmental Return System product line. Additionally, given the last year’s H1N1 flu concerns and subsequent demand
for flu shots and vaccines, our sales and marketing efforts are gaining substantial traction and our products are quickly
becoming a more standard fixture in the retail channel.
Improve product and service awareness to attract new customers.
As we grow, we intend to focus additional marketing and sales efforts toward educating home health care providers,
physician and dental clinics, pharmaceutical manufacturers, communities and government agencies of the benefits of our
products and the need for safe and environmentally-friendly methods of medical waste treatment. We believe that the full-
service nature of our product offerings, ease of our mail-based delivery system and convenience of our products will attract
new customers who are not yet aware of the services we provide. In addition to providing a convenient, cost-effective
solution to waste treatment, we believe future growth will be driven by the need for our customers to properly document and
track the disposal of their hazardous waste to maintain compliance with new and existing legislation. We believe our
participation in the legislative process and focus on accurate and thorough electronic tracking of waste disposal or treatment
will provide substantial benefits to new customers looking to comply with new standards and promote environmentally
cleaner business practices.
Develop new products and services.
We continue to develop new products and services including the Sharps® Medical Waste Management SystemTM, the
TakeAway™ line of products for unused medications (including the TakeAway™ Environmental Return System), the 18
gallon and 28 gallon Medical/Professional TakeAway™ Recovery System and the new RxTakeAway™ Recovery and
Reporting System which offers the collection, storage, audit, witnessed treatment and documentation of unused medications
such as flu vaccines, Tamiflu, and Relenza. These new product and service offerings allow us to gain further sales from
existing customers as well as gain new customers who have a need for more comprehensive products. We will continue our
efforts to develop new products and services designed to facilitate the proper and cost effective solutions for management of
medical waste and of unused dispensed medications to better serve our customers and the environment. Additionally, we
will continue to seek out and identify new small quantity medical waste generators and develop solutions to meet the needs
of these new customer segments. Research and development expenses were $41 thousand and $20 thousand for the fiscal
year ended June 30, 2010 and 2009, respectively.
CONCENTRATION OF CREDIT AND SUPPLIERS
Although Sharps has experienced growth in revenues over the past few years, there is an inherent concentration of credit risk
associated with accounts receivable arising from sales to its major customers. For the fiscal year ended June 30, 2010, two
customers represented approximately 68% of revenues. Those two customers represented approximately 27%, or $546
thousand of the total accounts receivable balance at June 30, 2010. For the fiscal year ended June 30, 2009, four customers
represented approximately 48% of revenues. Those same four customers represented approximately 28%, or $504 thousand
of the total accounts receivable balance at June 30, 2009. The Company may be adversely affected by its dependence on a
limited number of high volume customers. Management believes that the risks are mitigated by, (i) the contractual
relationships with key customers, (ii) the reputation of the Company and its high quality products and (iii) the continued
diversification of the Company’s products and services into additional markets outside of its traditional Health care customer
base.
Currently, the majority of Sharps transportation is sourced with the USPS, which consists of delivering the Sharps®
Recovery System™ (formerly Sharps Disposal by Mail System®) from the end user to the Company’s facility. The
Company also has an arrangement with UPS whereby UPS transports the Company’s Sharps® Recovery System™ products
from the end user to the Company’s facility. The Company began selling a UPS product to select customers in fiscal year
8
2007. Management believes the risk of dependence on the USPS is mitigated by (i) the arrangement with UPS and (ii) the
long-standing business relationship with and successful performance by USPS.
The Company maintains relationships with multiple raw materials suppliers and vendors in order to meet customer demands
and assure availability of our products and solutions. With respect to the Sharps® Recovery System™ (formerly Sharps
Disposal by Mail System®) solutions, the Company owns all proprietary molds and dies and utilizes three contract
manufacturers for the production of the primary raw materials. The Company believes that alternative suitable contract
manufacturers are readily available to meet the production specifications of the Company’s products and solutions. With
respect to the Company’s Pitch-It™ IV Poles, the Company maintains an exclusive manufacturing relationship with Drive
Medical Design & Manufacturing. The Company utilizes national suppliers such as Southern Container, Uline and W. W.
Grainger, Inc. for the majority of the raw materials used in the Company’s other products and solutions.
INTELLECTUAL PROPERTY
The Company has a portfolio of trademarks and patents, both granted and pending. The Company considers its trademarks
important in the marketing of its products and services, including Sharps Disposal by Mail System®,TakeAway™
Environmental Return System, Sharps®MWMS™, Pitch-It™ IV Poles, Trip LesSystem®, GREEN Waste Conversion
Process™ and PELLA-DRX™ among others. With respect to their registered marks, the Company will continue using such
marks and will file all necessary documentation to maintain their registrations for the foreseeable future. The Company
maintains patents on its Pitch-It™ IV Poles which are scheduled to expire in 2012. The Company has a number of patents
pending, including those applicable to the Company’s Sharps Secure® Needle Recovery System, the Sharps® Medical
Waste Management System™, and the GREEN Waste Conversion Process™, and is in the process of applying for other
trademarks and patents.
COMPETITION
There are several competitors who offer similar or identical products and services that facilitate the disposal of medical waste
outside the hospital and large health care setting. There are also a number of companies that focus specifically on the
marketing of products and services which facilitate disposal through transport by the USPS (similar to the Company’s
products). These companies include (i) smaller private companies or (ii) divisions of larger medical or solid waste
companies. Additionally, the Company does compete, in certain markets, with Stericycle, the largest medical waste company
in the country, which focuses primarily on a pick-up service business model. As Sharps continues to grow and increase
awareness of the proper disposal of syringes and unused medications it does believe it may face more and possibly
significant competition. The Company believes its patent-pending Waste Conversion Process™, first mover advantages,
excellent industry reputation, quality solutions and products, as well as its capabilities as a vertically integrated producer of
products and services, provides significant differentiation in the current competitive market.
GOVERNMENT REGULATION
Sharps is subject to extensive federal, state, and/or local laws, rules and regulations. The Company is required to obtain
permits, authorizations, approvals, certificates and other types of governmental permission from the EPA, the State of Texas
and the local governments in Carthage, Texas with respect to our facility. Such laws, rules and regulations have been
established to promote occupational safety and health standards and certain standards have been established in connection
with the handling, transportation and disposal of certain types of medical and solid wastes, including mailed sharps. Our
estimated annual costs of complying with these laws, regulations and guidelines is currently less than $100,000 per year. In
the event additional laws, rules or regulations are adopted which affect our business, additional expenditures may be required
in order for Sharps to be in compliance with such changing laws, rules and regulations.
COMPLIANCE WITH ENVIRONMENTAL LAWS
In November 2005 and September 2009, the EPA and the Texas Commission on Environmental Quality promulgated new
regulations under the Clean Air Act and associated state statutes which will affect the operations of the incineration facility
located in Carthage, Texas. These regulations modify the emission limits and monitoring procedures required to operate an
incineration facility. The new rules will necessitate changes to the Company’s owned incinerator and pollution control
equipment at the facility or require installation of an alternative treatment method to ensure compliance. These regulations
will also require the Company to obtain a Title V permit and conduct additional monitoring. The Company is required to
9
comply with these new standards by the end of 2012. Such changes will require the Company to incur capital expenditures in
order to meet the requirements of the regulations. The Company has studied these amended regulations and their options,
and decided in the interim to move forward with the process of adding alternative technology, autoclaving, which meets the
EPA Clean Air Act requirements, for medical waste disposal which became fully operational in February 2009 at its current
facility in Carthage, Texas. The Company believes autoclaving is environmentally cleaner and a less costly method of
treating medical waste than incineration. Due to its continued growth, the Company anticipates that it will incur additional
capital expenditures needed in order to meet the new air emission regulations. The additional capital expenditures are not
expected to exceed $1.0 million. The Company expects capital expenditures related to these new regulations to be made by
the end of the first half of fiscal year 2013.
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ITEM 1A. RISK FACTORS
We may be unable to manage our growth effectively.
We have experienced significant growth, with revenues increasing more than 58% for the fiscal year ended June 30, 2009
from the prior fiscal year and 93% from fiscal year ended June 30, 2009 to fiscal year ended June 30, 2010. This growth has
placed and will continue to place significant demands on our financial, operational and management resources. In order to
continue our growth, we may need to add operations, administrative and other personnel, and may need to make additional
investments in the infrastructure and systems. There can be no assurance that we will be able to find and train qualified
personnel, or do so on a timely basis, or expand our operations and systems to the extent, and in the time, required.
The loss of the Company’s senior executives could affect the Company’s ability to manage the business profitability.
Sharps’ growth and development to date has been largely dependent on the active participation and leadership of its senior
management team consisting of the Company’s Chairman and CEO, President, Senior Vice President of Sales, and Vice
President and CFO. The Company believes that the continued success of the business is largely dependent upon the
continued employment of the senior management team and has, therefore, (i) entered into individual employment agreements
with key personnel and (ii) granted equity-based stock compensation to senior management members in order to provide an
incentive for their continued employment with the Company. The unplanned loss of one or more members of the senior
management team and our inability to hire key employees could disrupt and adversely impact the Company’s ability to
execute its business plan.
The Company’s Board of Directors oversees CEO and senior management succession planning. The process focuses on
building management depth, considers continuity and stability within the Company, and responds to Sharps’ evolving needs
and changing circumstances. The Board approves continuity plans for the CEO and senior management succession planning
to enable the Board to respond to planned or unexpected vacancies in key positions. The Board considers optimizing the
ongoing safe and sound operation of the Company and minimizing any potential disruption or loss of continuity to our
business and operations as it evaluates the plan.
Our business is dependent on a small number of customers. To the extent we are not successful in winning additional
business mandates from our government and commercial customers or attracting new customers, our results of
operations and financial condition would be adversely affected.
We are dependent on a small group of customers. In addition, there is an inherent concentration of credit risk associated with
accounts receivable arising from sales to our major customers. For the fiscal year ended June 30, 2010, two customers
represented approximately 68% of revenues, of which the contract with the government represented 86% of revenues. Those
two customers represented approximately 27%, or $546 thousand, of the total accounts receivable balance at June 30, 2010.
To the extent these significant customers are delinquent or delayed in paying or we are not successful in obtaining consistent
and additional business from our existing and new customers, our results of operations and financial condition would be
adversely affected.
Aggressive pricing by existing competitors and the entrance of new competitors could drive down the Company’s profits
and slow its growth.
There are several competitors who offer similar or identical products and services that facilitate the disposal of medical waste
outside the hospital and large health care setting. There are also a number of companies that focus specifically on the
marketing of products and services which facilitate disposal through transport by the USPS (similar to the Company’s
products). These companies include (i) smaller private companies or (ii) divisions of larger medical or solid waste
companies. Additionally, the Company does compete, in certain markets, with Stericycle, the largest medical waste company
in the country, which focuses primarily on a pick-up service business model. As Sharps continues to grow and increase
awareness of the proper disposal of syringes and unused medications it does believe it may face more and possibly
significant competition. The Company believes its patent-pending Waste Conversion Process™, first mover advantages,
excellent industry reputation, quality solutions and products, as well as its capabilities as a vertically integrated producer of
products and services, provides significant differentiation in the current competitive market.
11
The lack of customer long-term volume commitments could adversely affect the Company’s profits and future growth.
Although the Company does enter into exclusive contracts with the majority of its enterprise customers, these contracts do
not have provisions for firm long-term volume commitments. In general, customer purchase orders may be canceled and
order volume levels can be changed or delayed with limited or no penalties. Canceled, delayed or reduced purchase orders
could significantly affect the financial performance of the Company.
An inability to maintain existing government contracts or win additional government contracts over an extended period
could have a material adverse effect on our operations and adversely affect our future revenue.
A material amount of our revenues are generated through the contract with a major U.S. government agency. Our revenues
for the first year of the five year contract (one year plus four option years) were approximately $28.5 million ($6.0 million of
which was recognized in fiscal year 2009, $22.5 million was recognized in the first half of fiscal year 2010). In January
2010, Sharps was awarded the first option year (ending January 31, 2011) valued at approximately $1.6 million and is
expected to be recognized from February 1, 2010 through January 31, 2011. There is expected to be approximately $1.6
million in revenue in calendar year 2010 for the maintenance component of the contract including $0.8 million in the second
half of fiscal year 2010. The remaining three option years are expected to be approximately $3.0 million per contract year.
Although, the Company believes the amounts above to be reasonable based upon the underlying contract and its current
project plan, it makes no assurances regarding the actual recognition of revenue by fiscal year, which could vary significantly
from that noted above. All contracts with, or subcontracts involving, the federal government are terminable, or subject to
renegotiation, by the applicable governmental agency on 30 days notice, at the option of the governmental agency. If we fail
to maintain or replace these relationships, or if a material contract is terminated or renegotiated in a manner that is materially
adverse to us, our revenues and future operations could be materially adversely affected.
As a government contractor, we are subject to extensive government regulation, and our failure to comply with
applicable regulations could subject us to penalties that may restrict our ability to conduct our business.
Governmental contracts or subcontracts involving governmental facilities are often subject to specific procurement
regulations, contract provisions and a variety of other requirements relating to the formation, administration, performance
and accounting of these contracts. Many of these contracts include express or implied certifications of compliance with
applicable regulations and contractual provisions. If we fail to comply with any regulations, requirements or statutes, our
existing governmental contracts or subcontracts involving governmental facilities could be terminated or we could be
suspended from government contracting or subcontracting. If one or more of our governmental contracts or subcontracts are
terminated for any reason, or if we are suspended or debarred from government work, we could suffer a significant reduction
in expected revenues and profits. Furthermore, as a result of our governmental contracts or subcontracts involving
governmental facilities, claims for civil or criminal fraud may be brought by the government for violations of these
regulations, requirements or statutes.
The Company is subject to extensive and costly federal, state and local laws and existing or future regulations may
restrict the Company’s operations, increase our costs of operations and subject us to additional liability.
Sharps is subject to extensive federal, state, and/or local laws, rules and regulations. We are required to obtain permits,
authorizations, approvals, certificates and other types of governmental permission from the EPA, Texas and the local
governments in Carthage, Texas with respect to our facility. Such laws, rules and regulations have been established
to promote occupational safety and health standards and certain standards have been established in connection with the
handling, transportation and disposal of certain types of medical and solid wastes, including mailed sharps. Sharps believes
that it is currently in compliance in all material respects with all applicable laws and regulations governing its business,
including the permits and authorizations for its incinerator facility. Our estimated annual costs of complying with these laws,
regulations and guidelines is currently less than $100,000 per year. In the event additional laws, rules or regulations are
adopted which affect our business, additional expenditures may be required in order for Sharps to be in compliance with such
changing laws, rules and regulations. Furthermore, any material relaxation of any existing regulatory requirements governing
the transportation and disposal of medical waste could result in a reduced demand for Sharps’ products and services and
could have a material adverse effect on Sharps’ revenues and financial condition. The scope and duration of existing and
future regulations affecting the medical and solid waste disposal industry cannot be anticipated and are subject to change.
12
In November 2005 and September 2009, the EPA and the Texas Commission on Environmental Quality promulgated new
regulations under the Clean Air Act and associated state statutes which will affect the operations of the incineration facility
located in Carthage, Texas. These regulations modify the emission limits and monitoring procedures required to operate an
incineration facility. The new rules will necessitate changes to the Company’s owned incinerator and pollution control
equipment at the facility or require installation of an alternative treatment method to ensure compliance. These regulations
will also require the Company to obtain a Title V permit and conduct additional monitoring. Such changes will require the
Company to incur significant capital expenditures in order to meet the requirements of the regulations. The Company has
studied these amended regulations and their options, and decided in the interim to move forward with the process of adding
alternative technology, autoclaving, which meets the EPA Clean Air Act requirements, for medical waste disposal which
became fully operational in February 2009 at its current facility in Carthage, Texas. Autoclaving is a process that treats
regulated waste with steam at high temperature and pressure to kill pathogens. Combining the autoclaving with a shredding
or grinder process allows the waste to be disposed in a landfill operation. The Company believes autoclaving is
environmentally cleaner and a less costly method of treating medical waste than incineration. Due to its continued growth,
the Company anticipates that it will incur additional capital expenditures needed in order to meet the new air emission
regulations. The additional capital expenditures are not expected to exceed $1.0 million. The Company expects capital
expenditures related to these new regulations to be made by the end of the first half of fiscal 2013.
The inability of the Company to operate its treatment facility would adversely affect its operations.
The Company’s business utilizes a facility for the proper disposal or treatment of medical waste and unused pharmaceuticals.
The Company’s owned facility has both incineration and autoclave technologies in Carthage, Texas (Panola County). Prior
to the purchase of the facility in January 2008, the Company operated the facility since 1999 under a lease arrangement. The
Company believes it operates and maintains the facility in compliance in all material respects with all federal, state and local
laws and/or any other regulatory agency requirements involving solid waste disposal and the operation of the incinerator
facility. The failure to maintain the permits for the treatment facility or unfavorable conditions contained in the permits could
substantially impair our operations and reduce our revenues. Although the Company has an agreement with a secondary
treatment facility to provide services in the event both the incinerator and autoclave are unavailable, any disruption in the
availability of a disposal or treatment facility whether as a result of action taken by governmental authorities, natural
disasters or otherwise would have an adverse affect on the Company’s operations and results of operations.
The handling and disposal or treatment of regulated waste carries with it the risk of personal injury to employees and
others.
Our business requires us to handle materials that may be infectious or hazardous to life and property in other ways. Although
our products and procedures are designed to minimize exposure to these materials, the possibility of accidents, leaks, spills,
and acts of God always exists. Human beings, animals or property could be injured, sickened or damaged by exposure to
regulated waste. This in turn could result in lawsuits in which we are found liable for such injuries, and substantial damages
could be awarded against us. While we carry liability insurance intended to cover these contingencies, particular instances
may occur that are not insured against or that are inadequately insured against. An uninsured or underinsured loss could be
substantial and could impair our profitability and reduce our liquidity.
The possibility of postal work interruptions and restrictions on shipping through the mail would adversely affect the
disposal or treatment element of the Company’s business and have an adverse effect on our operations, results of
operations and financial condition.
Sharps currently transports (from the patient or user to the Company’s facility) the majority of its solution offerings using
USPS; therefore, any long-term interruption in USPS delivery services would disrupt the disposal or treatment element of the
Company’s business. Postal delivery interruptions are rare. Additionally, since USPS employees are federal employees, such
employees may be prohibited from engaging in or continuing a postal work stoppage, although there can be no assurance that
such work stoppage can be avoided. As noted above, the Company entered into an arrangement with UPS whereby UPS
transports the Company’s Sharps® Recovery System ™ (formerly Sharps Disposal by Mail System®) products from the
non-health care facility end user to the Company’s owned facility. The Company began selling a UPS product to select
markets in fiscal year 2007. The ability to ship items, whether through the USPS or UPS, is regulated by the government.
Any change in regulation restricting the shipping of medical waste and unused pharmaceuticals through these channels would
be detrimental to Sharps’ ability to conduct its operations. Notwithstanding the foregoing, any disruption in the
transportation of products would have an adverse effect on our operations, results of operations and financial condition.
13
The Company’s stock has experienced, and may continue to experience, low trading volume and price volatility.
The Company’s common stock has been listed on the NASDAQ Capital Market (“NASDAQ”) under the symbol “SMED”
since May 6, 2009. The daily trading volumes for the Company’s common stock are, and may continue to be, relatively small
compared to many other publicly traded securities. Since trading on the NASDAQ, the Company’s average daily trading
volume has been approximately 100,000 shares. It may be difficult for you to sell your shares in the public market at any
given time at prevailing prices, and the price of the Company’s common stock may, therefore, be volatile.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of the date of this report, the Company did not have any unresolved staff comments.
ITEM 2. DESCRIPTION OF PROPERTY
Sharps leases 190,489 square feet of space in Houston, Texas and College Park, Georgia. Sharps has manufacturing,
assembly, distribution and warehousing operations and corporate offices in Houston, Texas. The Company maintains a
warehouse facility in College Park, Georgia. These leases expire from April 2014 to April 2015 with options to renew the
Company’s leases for warehouses for 5 years and for office space 10 years.
The Company owns and operates a facility in Carthage, Texas that houses our processing and treatment operations in an
estimated 12,000 square foot building on 4.5 acres of land. The facility is permitted to process 40 tons per day of municipal
solid waste. The incinerator at the facility is currently permitted to treat eleven tons per day of municipal solid waste while
the autoclave is capable of treating up to seven tons per day of waste.
ITEM 3. LEGAL PROCEEDINGS
Ronald E. Pierce Matter
In June 2004, the Company provided its then Chief Operating Officer, Mr. Ronald E. Pierce (“Mr. Pierce”) with notice of
non-renewal of his agreement. In July 2008, the Company received a demand for arbitration from Mr. Pierce related to his
termination of employment with a claim amount of $300,001. Upon completion of the arbitration process (April 23, 2010),
the Company received notice that the Arbitration Panel hearing Mr. Pierce’s employment-related matter ruled in favor of the
Company (i.e., no liability of the Company to Mr. Pierce). In July 2010, the Company settled a counter claim against Mr.
Pierce related to this matter in exchange for a payment by Mr. Pierce to the Company in the amount of $12,500.
14
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information: Beginning May 6, 2009, the Company’s common stock has been quoted on the NASDAQ under the
symbol “SMED”. Previously, the Company’s common stock was quoted on the over-the-counter (“OTC”) Bulletin Board
under the symbol “SCOM”. The Company’s common stock had an average trading volume of approximately 267,000 shares
traded per month during fiscal year 2009. Since trading on the NASDAQ (May 6, 2009), the Company’s common stock had
an average trading volume of approximately 2,078,857 shares traded per month. The table below sets forth the high and low
closing prices of the Company’s common stock on the OTC Bulletin Board (July 1, 2008 through May 5, 2009) and the
NASDAQ (May 6, 2009 through August 24, 2010) for each quarter within the last two fiscal years.
Fiscal Year Ended June 30, 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended June 30, 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ending June 30, 2011
First Quarter (August 24, 2010)
Common Stock
High
Low
$
$
$
$
3.07
2.80
3.80
6.36
$
$
$
$
10.18
11.91
10.27
7.68
$
$
$
$
2.35
1.50
1.60
3.21
$
$
$
$
6.21
7.97
5.85
3.98
$
5.45
$
4.25
Stockholders: At August 24, 2010, there were 14,907,091 shares of common stock held by approximately 185 holders of
record. The last reported sale of the common stock on August 24, 2010 was $4.25 per share.
Dividend Policy: The Company has never declared nor paid any cash dividends on its common stock. The Company
currently intends to retain its cash generated from operations for working capital purposes and to fund the continued
expansion of its business and does not anticipate paying any dividends on our common stock in the foreseeable future.
Issuer Purchases of Equity Securities: The Company has no reportable purchases of equity securities.
15
Securities Authorized for Issuance under Equity Compensation Plans:
The following equity plan information is provided as of June 30, 2010:
Equity Compensation Plan Information
Plan Category
Equity compensation plans
approved by stockholders (1)(2)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted average
exercise price of
outstanding options,
warrants and rights (3)
(b)
821,192
$
4.21
Total
821,192
$
4.21
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
(c)
105,173
105,173
Notes:
(1) Represents stock options issued under the 1993 Sharps Compliance Corp. Stock Plan.
(2) Includes the effect of 29,565 shares of Restricted Stock issued to Directors (i.e. vested and unvested).
(3) Weighted Average exercise price excludes the effect of 29,565 shares of Restricted Stock issued to Directors.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) the Company is not required to provide the information required by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and
related notes appearing elsewhere in this Annual Report on Form 10-K. See “Information Regarding Forward Looking
Statements.”
16
RESULTS OF OPERATIONS
The following analyzes changes in the consolidated operating results and financial condition of the Company during the
twelve months ended June 30, 2010 and 2009. The following table sets forth, for the periods indicated certain items from the
Company’s Consolidated Statement of Income, expressed as a percentage of revenue:
Net revenues
Costs and expenses:
Cost of revenues
Selling, general and administrative
Depreciation and amortization
Total costs and expenses
Income from operations
Total other income
Income tax expense (benefit)
Net income
Year Ended June 30,
2010
2009
100%
(40%)
(22%)
(1%)
(63%)
37%
0%
13%
24%
100%
(48%)
(33%)
(2%)
(83%)
17%
0%
(4%)
21%
YEAR ENDED JUNE 30, 2010 COMPARED TO YEAR ENDED JUNE 30, 2009
Total revenues for the fiscal year ended June 30, 2010 of $39.2 million increased by $18.9 million, or 92.9%, over the total
revenues for the fiscal year ended June 30, 2009, of $20.3 million. Billings by market are as follows (in thousands):
2010
(Unaudited)
Year Ended June 30,
2009
(Unaudited)
Variance
(Unaudited)
BILLINGS BY MARKET:
Government
Health Care
Retail
Professional
Hospitality
Pharmaceutical
Other
Subtotal
GAAP Adjustment *
Revenue Reported
$
$
$
23,842
6,543
4,338
1,644
1,015
742
1,284
39,408
(252)
39,156
6,254
7,454
1,933
1,059
917
1,558
1,500
20,675
(378)
20,297
17,588
(911)
2,405
585
98
(816)
(216)
18,733
126
18,859
$
$
$
*Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles
(“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped during the period reported. GAAP
revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period
sales and (ii) recognition of certain revenue associated with products returned for disposal or treatment. The difference between customer
billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue. See Note 2 “Revenue Recognition” in
“Notes to Consolidated Financial Statements”.
This Annual Report on Form 10-K contains certain financial information not derived in accordance with GAAP, including
17
customer billings information. The Company believes this information is useful to investors and other interested parties as
customer billings represents all invoiced amounts associated with products shipped during the period reported. Such
information should not be considered as a substitute for any measures derived in accordance with GAAP, and may not be
comparable to other similarly titled measures of other companies. Reconciliation of this information to the most comparable
GAAP measures is included above.
The increase in revenues is primarily attributable to increased billings in the Government ($17.6 million), Retail ($2.4
million), and Professional ($585 thousand) markets. These increases were partially offset by decreased billings in the Health
care ($911 thousand), and Pharmaceutical ($816 thousand) markets. The increase in the Government market is a result of a
$17.2 million increase in billings related to the sale of the Company’s Sharps®MWMS™ to a major U.S. government
agency under the contract announced in February 2009. The increase in the Government market also included $216 thousand
related to the support of a major U.S. city immunization program, $135 thousand related to the sales of the TakeAway™
Environmental Return System as part of the State of Iowa and State of North Dakota funded programs and $41 thousand
related to the Company’s U.S. Department of Veterans Affairs Pilot Program. The increase in the billings in the Retail
market is a result of, (i) increased market and customer penetration, (ii) a strong 2009 flu shot season (i.e., purchases of the
Sharps® Recovery System™ (formerly Sharps Disposal By Mail Systems®) by retail clinics and pharmacies who use the
products to collect, store and properly treat syringes used to administer flu-related shots including H1N1) , (iii) increased
purchases of the Sharps® Recovery System™ solutions used to support community programs, and (iv) fourth quarter Retail
billings in preparation of the 2010 flu shot season. The increase in Professional market billings is due to the impact of the
Company’s recently launched outbound sales initiative as well as physician, dental, and veterinary offices becoming aware
(through the efforts of the Company and its strong distributor network) of cost-effective alternatives to the traditional medical
waste pick- up. The decrease in the Health Care market billings is related to the ordering patterns of the larger home health
care customers as well as additional distributor incentives designed to drive future growth in this market. The decrease in the
Pharmaceutical market billings is due to the variability in timing associated with the Patient Support Programs the Company
provides to the drug manufacturers and the discontinuance of a major Patient Support Program.
Cost of revenues for the year ended June 30, 2010 of $15.5 million was 39.6% of revenues. Cost of revenues for the year
ended June 30, 2009 of $9.8 million was 48.5% of revenues. The higher gross margin for the fiscal year ended June 30,
2010 of 60.4% (versus 51.5% for the prior fiscal year) was a result of (i) the higher revenue (i.e. higher coverage of fixed
cost components in cost of goods sold) and (ii) the mix of products and services sold in fiscal year 2010. This was partially
offset with a lower gross margin percentage in the third (24.3%) and fourth (29.4%) quarters, which is a result of (i) products
and services sold, (ii) higher operations and treatment facility personnel cost, and (iii) increase in the fixed components of
cost of sales, namely the operational and treatment facility and infrastructure related cost.
Selling, general and administrative (“SG&A”) expenses for the twelve months ended June 30, 2010 of $8.8 million,
increased by $2.2 million, or 33.5%, over the SG&A expenses for the twelve months ended June 30, 2009. The increase in
SG&A expense is primarily due to higher (i) compensation and benefit expense of $610 thousand (primarily due to
increased number of employees (increase in year-over-year headcount of 23 of which 15 are focused on sales and marketing-
related activities), (ii) payroll tax expense of $94 thousand (primarily related to common stock issued in conjunction with the
public offering), (iii) non-cash, stock based compensation expense of $523 thousand (primarily due to the accrued quarterly
expense associated with the award of 51,500 shares of restricted stock of Company common stock to non-employee directors
as the equity portion of the fiscal year 2010 Board of Director compensation (vesting over fiscal year 2010) and the award of
560,000 additional stock options, in November 2008, July 2009, and June 2010, to employees, including officers), (iv)
professional fees of $664 thousand (primarily due to contract sales personnel, patent preparation and filing expenses, legal
fees related to the Ronald Pierce arbitration (See NOTE 9 of Notes to the Condensed Consolidated Financial Statements),
regulatory consulting, audit and related fees, and NASDAQ listing fees), (v) costs related to increased sales and marketing-
related activities of $361 thousand primarily due to increased sales, advertising, and public relations costs (including the
launch of the Company’s new Waste Conversion Process), and (vi) computer and systems-related expenses of $167 thousand
(primarily due to an increase in locations and software support). The fourth quarter of fiscal year 2009 was negatively
impacted a special charge of $512 thousand which represents expenses incurred with the departure of a former officer of the
Company.
The Company generated operating income of $14.4 million for the year ended June 30, 2010 compared to an operating
income of $3.5 million for the year ended June 30, 2009. The operating margin was 36.8% for the year ended June 30, 2010
compared to 17.1% for the year ended June 30, 2009. The increase in operating income and operating margin is a result of
the above mentioned increase in revenue and operating leverage inherent in the Company’s business model.
18
The Company generated income before tax of $14.4 million (36.9% of revenue) for the year ended June 30, 2010 versus a
pre-tax income of $3.5 million (17.2% of revenue) for the year ended June 30, 2009. The increase in pre-tax income is a
result of higher operating income (discussed above).
The Company generated net income of $9.4 million for the year ended June 30, 2010 compared to net income of $4.2 million
for the year ended June 30, 2009. The increase in net income is a result of higher operating income (discussed above). The
year ended June 30, 2009 was positively impacted by the reduction in the deferred tax valuation allowance of $1.8 million
and corresponding credit to tax expense booked in December 2008 (see Note 6 of the Condensed Consolidated Financial
Statements).
The Company reported diluted earnings per share of $0.63 for the year ended June 30, 2010 versus diluted earnings per share
of $0.30 for the year ended June 30, 2009. The increase in diluted earnings per share is a result of a higher net income
(discussed above). The earnings per share for the year ended June 30, 2010 were adversely impacted by the increase in
number of shares used in the computation of 955,974 which was a result of (i) the pro-rated impact of the 577,146 shares of
Company common stock issued in conjunction with the public offering (see Note 7), (ii) the pro-rated impact of stock
options to purchase 972,874 of common shares (July 1, 2009 through June 30, 2010), (iii) the issuance of 84,227 shares of
restricted shares and (iv) impact on diluted shares of the higher stock price.
PROSPECTS FOR THE FUTURE
in
to
of
the
that
used
trash
dispose
advised
patients
syringes
previous
guidance
The Company continues to take advantage of the many opportunities in the markets served as communities, consumers,
government and health care and commercial organizations become more aware of the need for the proper treatment of
medical sharps waste and unused dispensed medications. This education process was enhanced in December 2004 when the
U. S. Environmental Protection Agency (“EPA”) issued its new guidelines for the proper disposal of medical sharps, revising
(see
the
http://www.epa.gov/wastes/nonhaz/industrial/medical/med-govt.pdf). Additionally, in July 2006 both the states of California
and Massachusetts passed legislation designed to mandate appropriate disposal of sharps waste necessary to protect the
general public and workers from potential exposure to contagious diseases and health and safety risks. Currently, nine states
ban the disposal of used syringes in the trash and four states are considering similar legislation, while the remaining states
operate under the EPA guidance noted above. In August 2008, the U.S. House of Representatives and U.S. Senate
introduced bills 3251 and 1909, respectively, if enacted, which would provide for Medicare reimbursement, under part D, for
the safe and effective disposal of used needles and syringes. In October 2009, California passed Senate Bill 486 requiring
drug companies that market and sell prescribed medications that are routinely injected at home to submit plans to the
California Integrated Waste Management Board on or before July 1, 2010 (and annually thereafter) describing how they
support safe needle collection and disposal programs for patients using their drugs. Among the methods recommended as
part of the above noted regulatory actions are mail-back programs such as those marketed by the Company. The Centers for
Disease Control (the “CDC”) and the EPA estimate that there are over three billion used syringes disposed of annually
outside of the hospital setting in the United States. The Company estimates that it would require 30 to 50 million Sharps®
Recovery System™ (formerly Sharps Disposal by Mail System®) products to properly dispose of all such syringes, which
would equate to a market opportunity of $1 billion. Based upon the current level of sales, the Company estimates that it has
penetrated approximately 1% of this $1 billion market opportunity. Additionally, an estimated 40% of the four billion
dispensed medication prescriptions go unused every year in the United States generating an estimated 200 million pounds of
unused medication waste. The Company estimated the market opportunity for the proper recovery and management of the
unused medications to be at least $1 billion per year.
The Company continues to develop new products and services including the Sharps® MWMS™, the TakeAway™ line of
products for unused medications (including the TakeAway™ Environmental Return System), the 18 and 28 gallon Medical
Professional Recovery System, the Sharps® Recovery System™ (formerly Sharps Disposal by Mail System®) and the new
TakeAway™ Recovery and Reporting System which offers the collection, storage, audit, witnessed treatment and
documentation of unused medications such as flu vaccine, Tamiflu, and Relenza. The Company continues to develop
products and services designed to facilitate the proper and cost effective solutions for management of medical waste and
unused dispensed medication generated outside of the hospital and large health care facility setting. The Company believes
its future growth will be driven by, among other items, (i) the positive impact and awareness created by the existing and
above noted regulatory actions as well as additional potential future legislation, (ii) the effects of the Company’s extensive
direct marketing and public relations efforts and (iii) the Company’s leadership position in the development and sales of
19
products and services designed for the proper and cost effective solutions for management of medical waste and unused
dispensed medications generated outside the hospital and large health care facility setting.
Demand for the Company’s primary product, the Sharps® Recovery System™ (formerly Sharps Disposal by Mail
System®), which facilitates the proper and cost-effective management of medical waste including hypodermic needles,
lancets and other devices or objects used to puncture or lacerate the skin (referred to as “sharps”), has been growing rapidly
because of its cost-effective and convenient mail-back component and unique data tracking feature. In addition, targeted
opportunities continue to expand as a result of, (i) legislation mandating the proper disposal of sharps, (ii) the growing
awareness of the need to properly handle sharps medical waste for safety and environmental concerns, (iii) the significant
increase in self-injectable medications and (iv) the changing paradigm in the health care industry.
The Company anticipates another strong flu shot business (included in the Retail market billings) in light of heightened
awareness of the need for flu vaccines and increased accessibility of the vaccine at traditional retailers. Traditionally, the flu
shot season positively impacts the quarter ended September 30, however, the Company recognized Retail market billings of
$1.1 million in the fourth quarter of June 30, 2010 more than double the $0.5 million in the prior year.
The Company is actively marketing its Sharps®MWMS™ to federal, state and local agencies as well as to large
corporations. On February 2, 2009, the Company announced a $40 million contract award (the “U.S. Government
Contract”) award to provide its Sharps®MWMS™ to a major U.S. government agency. The total contract is expected to be
executed over a five year period (one year plus four option years). On February 1, 2009, the Company received a purchase
order for $28.5 million ($6.0 million of which was recognized in fiscal year 2009, $22.5 million was recognized in the first
half of fiscal year 2010). In January 2010, Sharps was awarded the first option year (ending January 31, 2011) valued at
approximately $1.6 million and is expected to be recognized from February 1, 2010 through January 31, 2011. There is
expected to be approximately $1.6 million in revenue in calendar year 2010 for the maintenance component of the contract
including $0.8 million in the second half of calendar year 2010. The remaining three option years are expected to be
approximately $3.0 million per contract year. Although, the Company believes the amounts above to be reasonable based
upon the underlying contract and its current project plan, it makes no assurances regarding the actual recognition of revenue
by fiscal year, which could vary significantly from that noted above.
In December 2009, Sharps Compliance was awarded a five-year Federal Supply schedule contract by the General Services
Administration of the U.S. Government (GSA). The GSA Schedule provides a streamlined vehicle for federal government
agencies to purchase the Company’s products and services. Sharps was also awarded a Distribution and Pricing Agreement
(DAPA) with the Defense Supply Center of Philadelphia’s Directorate of Medical Material which provides the automated
tools to promote efficient procurement of medical-related products for the Department of Defense. The Company believes
these two contracts should facilitate the sale of virtually all of the Company’s products and solutions (in addition to the
Sharps®MWMS™) to the many U.S. Government agencies whom, to-date, have not purchased significant quantities of
products or solutions designed to address the proper treatment of used syringes and other sharps as well as unused
medications generated outside of the hospital setting utilizing the USPS or UPS.
In January 2010, the Company announced a pilot program with the United States Department of Veterans Affairs (“VA”).
The program was launched within the VA Capitol Health Care Network (“Veterans Integrated Service Network 5” or “VISN
5”), which currently provides quality health care for eligible veterans in Maryland and portions of Virginia, West Virginia,
and Pennsylvania, as well as the District of Columbia. The pilot allows each of the medical centers within the VISN 5
region, both inpatient and outpatient, to provide the Sharps® Recovery System™ (formerly known as the Sharps Disposal
By Mail System®) and the TakeAway™ Environmental Return System solutions to their patients. Since its original launch,
the pilot program has now expanded to three other geographic regions including VISN 12 (which covers Illinois, Wisconsin,
and the upper peninsula of Michigan), VISN 18 (which covers Arizona, New Mexico, and Western Texas) and VISN 20
(which covers Alaska, Idaho, Oregon, and Washington). The VISN network is part of the Veterans Health Administration
which encompasses the largest integrated health care system in the United States, consisting of 153 medical centers, in
addition to numerous community based outpatient clinics, community living centers and Vet Centers. Together these health
care facilities provide comprehensive care to over 5.5 million Veterans each year.
The Sharps®MWMS™, a Medical Waste Management System, is a comprehensive medical waste and dispensed
medication solution which includes an array of products and services necessary to effectively collect, store and treat medical
waste and unused dispensed medication outside of the hospital or large health care facility setting. Sharps®MWMS™, which
is designed for rapid deployment, features the Sharps® Recovery System™ (formerly known as the Sharps Disposal By Mail
20
System®) and TakeAway™ Environmental Return System products (the “Products”) combined with warehousing, inventory
management, training, data and other services (the “Services”) necessary to provide a comprehensive solution. The
Sharps®MWMS™ is designed to be an integral part of governmental and commercial emergency preparedness programs.
The Company recognizes revenue for the Product portion of the contract in accordance with the revenue recognition policy
for the Sharps® Recovery System™ (formerly Sharps Disposal By Mail System®) products. The Services portion of the
contract, described above, is recognized as revenue as services are performed.
We believe the pace of regulation of sharps and unused dispensed medications disposal is gaining momentum at both the
state and federal level. Currently, 13 states restrict or have introduced legislation to restrict the disposal of used sharps in
household trash and 11 states have also enacted or introduced legislation to regulate the disposal of pharmaceuticals to
reduce pollution of the environment. As state and federal enforcement of these statutes increases, more companies will turn
to solutions such as ours to help manage their medical waste and regulatory compliance. We believe the Company is well
positioned to benefit given our strict adherence to established standards and extensive documentation and records.
The Company serves multiple markets including, but not limited to, Government, Health Care, Retail, Professional,
Hospitality, Pharmaceutical, and Other markets. As shown in the results for the fiscal year ended June 30, 2010, the
Company experienced a significant increase in its overall business, primarily related to the Government ($40.0 million U.S.
Government contract), Retail (strong flu shot season) and Professional (launched outbound sales initiative) markets. The
$28.5 million build-out phase of the major government contract occurred throughout calendar year 2009. There is expected
to be approximately $1.6 million in revenue in calendar year 2010 for the maintenance component including the $0.8 million
which was recognized in the second half of fiscal year 2010. In addition, the maintenance component of the contract includes
approximately $3.0 million in years 2011, 2012, and 2013. These increases were partially offset by decreases in the Health
Care (ordering patterns of health care customers and distributor incentives) and Pharmaceutical (timing in association with
Patient Support Programs) markets. In the Pharmaceutical market, the sales cycle has been longer than initially anticipated.
The Company is most encouraged by opportunities in the Retail market and Government market through offerings to major
retail pharmacies and expansion of the VA Pilot Program and the existing MWMS™ Program to address unused
medications.
The Company currently has a cash balance of $18.1 million and no debt as of June 30, 2010. Additionally, the Company
received a federal income tax refund of $2.0 million in July 2010. On July 15, 2010, the Company entered into a Credit
Agreement (“the Credit Agreement”) with Wells Fargo, National Association. The Credit Agreement replaces the credit
agreement executed on March 9, 2010 with J.P. Morgan Chase, N.A. As of the date of issuance of the Annual Report, the
Company had no outstanding borrowings, $105 thousand in letters of credit outstanding, and $4.9 million of credit available.
The patent-pending GREEN Waste Conversion Process™, announced by the Company in April 2010, eliminates medical
waste processed for the Company’s customers from going into landfills. The process transforms treated medical waste into a
new product called PELLA-DRX™ - a clean, raw material used in the manufacture of industrial resource. Treatment of
medical waste has presented major concerns for American society as the vast majority of medical waste is ultimately
disposed of in landfills, creating massive liabilities for future generations. The Sharps Waste Conversion Process™ creates a
sustainable product and a much needed GREEN method to treat medical waste while creating a useable, safe, and clean raw
material. We believe PELLA-DRX™ is ideally suited for energy intensive industries like cement, lime, steel, and power
plants.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash and cash equivalents increased by $13.3 million to $18.1 million at June 30, 2010 from $4.8 million at June 30, 2009.
The increase in cash is due to cash generated by operating activities of $9.3 million plus the net proceeds from the public
offering of $4.8 million, the exercise of stock options of $1.1 million and the excess tax benefits of $1.1 million from stock
based award activity, partially offset by capital expenditures of $3.0 million.
Accounts receivable increased by $427 thousand to $2.0 million at June 30, 2010 from $1.6 million at June 30, 2009. The
increase is primarily due to $1.1 million in Retail billings in the fourth quarter of the 2010 fiscal year related to the
preparation for the 2010 flu shot season.
21
Inventory decreased by $545 thousand to $1.7 million at June 30, 2010 from $2.3 million at June 30, 2009. The decrease in
inventory is primarily attributable to the completion of the initial product phase of the U.S. Government contract.
Prepaid and other current assets increased by $2.6 million to $3.4 million at June 30, 2010 from $776 thousand at June 30,
2009. The increase is primarily due to the prepaid income taxes (federal) of $2.8 million which represents the payment in
December 2009 of federal income taxes offset by tax benefits related to third and fourth quarter losses. The Company
received a federal income tax refund of $2.0 million in July 2010.
Property, plant and equipment, net increased by $2.2 million to $5.6 million at June 30, 2010 from $3.4 million at June 30,
2009. The increase in property and equipment is due to capital expenditures of $3.0 million which was partially offset by
depreciation expense of $768 thousand and disposal of assets of $341 thousand. The capital expenditures are attributable
primarily to the investment of (i) leasehold improvements of $872 thousand, (ii) warehouse/operations-related equipment of
$797 thousand, (iii) facility improvements and related operations equipment of $201 thousand, (iv) molds, dies and printing
plates of $197 thousand (v) computer equipment and custom software programming totaling $193 thousand, (vi) furniture for
expanded office space of $91 thousand, and (vii) phone system expansion of $19 thousand. In addition to the above and in
conjunction with the newly introduced patent-pending GREEN Waste Conversion Process™ that transforms treated medical
waste into a new product called PELLA-DRX™, the Company spent approximately $584 thousand related to equipment to
support the production of this product. The warehouse/operations equipment included racking and related equipment
necessary to accommodate the expansion of the Company’s Texas and Atlanta operations and distribution facilities. The
leasehold expenditures were incurred to support the Company’s expansion in both its Texas and Georgia facilities. The
molds, dies and printing plates were procured for development of new products and duplicate molds needed to facilitate
additional production capacity in light of the Company’s growth. The facility expenditures included a generator and general
facility upgrades to the autoclave system.
Accounts payable decreased by $1.3 million to $1.2 million at June 30, 2010 from $2.5 million at June 30, 2009. The
decrease is a result of the timing of payments for raw materials purchased (reflecting the completion of the product portion of
the U.S. Government contract) and capital expenditures related to the expansion effort discussed in the paragraph above.
Accrued liabilities decreased by $109 thousand to $1.1 million at June 30, 2010 from $1.2 million at June 30, 2009.
Stockholders’ equity increased by $17.3 million to $26.9 million at June 30, 2010 from $9.6 million at June 30, 2009. This
increase is attributable to, (i) net income for the year ended June 30, 2010 of $9.4 million, (ii) the $4.8 million effect of the
577,146 shares sold in the December 2009 public offering at $9.165 per share (net of underwriting commission), (iii) the
effect of stock options to purchase 972,874 common stock exercised with proceeds of $1.1 million (average exercise price of
$1.10), (iv) the effect on equity (credit) of non-cash stock based award expense of $980 thousand, and (v) the excess tax
benefits from stock-based award activity of $1.1 million.
In the second quarter of fiscal 2010, the Company completed a public offering of 577,146 shares, of which 77,146 were sold
to cover the over-allotment option, at a price of $9.165 per share (net of underwriting commission). The net proceeds of
$4.8 million from the shares sold by the Company (net of direct offering expenses) is expected to be used for general
corporate purposes, including expansion of our product offerings, facilities and infrastructure to meet the continued expected
growth of the Company.
Off -Balance Sheet Arrangements
The Company entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not
directly reflected in our balance sheets. The Company’s most significant off-balance sheet transactions include commitments
associated with non-cancelable operating leases (See Note 9 Commitments and Contingencies). The Company has other off-
balance sheet obligations involving letters of credit (See Note 5 Notes Payable and Long-Term Debt).
The Company entered into non-cancelable operating leases for certain of our facility, vehicle and equipment needs. These
leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than
purchasing them. At the end of the lease, we have no further obligation to the lessor. If we decide to cancel or terminate a
lease before the end of its term, we would typically owe the lessor the remaining lease payments under the term of the lease.
22
Credit Facility
On July 15, 2010, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National
Association. The Credit Agreement replaces the credit agreement executed on March 9, 2010 with JPMorgan Chase Bank,
N.A. (the “Prior Credit Agreement”). The Credit Agreement provides for a two-year, $5.0 million line of credit facility, the
proceeds of which may be utilized for: (i) working capital, (ii) capital expenditures, (iii) letters of credit (up to $500,000),
(iv) acquisitions (up to $1,000,000) and (v) general corporate purposes. Unlike the Prior Credit Agreement, there is no
borrowing base computation that limits the amount of borrowings under the Credit Agreement. The Credit Agreement
expires on July 15, 2012.
Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets. Borrowings bear interest at
either (i) a fluctuating rate per annum equal to LIBOR plus a margin of 250 basis points or (ii) at the Company’s option, a
fixed rate for a 30, 60, or 90 day period set at the option date’s LIBOR plus a margin of 250 basis points. Any outstanding
revolving loans, and accrued and unpaid interest, will be due and payable on July 15, 2012, the maturity date of the Credit
Agreement. The Company paid a one-time non-refundable commitment fee of $10,000 applicable to the entire two year term
of the Credit Agreement. The Company will pay a fee of 0.2% per annum on the unused amount of the line of credit. We
estimate that the interest rate applicable to the borrowings under the Credit Agreement would be approximately 3.0% as of
June 30, 2010.
The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to
maintain a minimum level of tangible net worth of $21 million and not exceed a ratio of liabilities to tangible net worth of
1.0 to 1.0. The Company is in compliance with all covenants as of the date of issuance of the consolidated financial
statements. The Credit Agreement also contains customary events of default. Upon the occurrence of an event of default that
remains uncured after any applicable cure period, the lenders’ commitment to make further loans may terminate and the
Company may be required to make immediate repayment of all indebtedness to the lenders.
Management believes that the Company’s current cash resources (cash on hand and cash generated from operations) along
with its $5.0 million line of credit with Wells Fargo Bank will be sufficient to fund operations for the twelve months ending
June 30, 2011.
Treatment Facility
The Company’s treatment facility in Carthage, Texas includes an incinerator which is currently permitted at a capacity of
eleven tons per day. In February 2009, the Company installed an autoclave system and technology capable of treating up to
seven tons per day of medical waste at the same facility. Autoclaving is a process that treats medical waste with steam at
high temperature and pressure to kill pathogens. The autoclave is a technology that is a cost-effective alternative to
traditional incineration. It also supplements the treatment capacity of the Company and is an integral part of the treatment
operations as the Company utilizes both incineration and autoclave technology in its day-to-day operations. The autoclave
system is not impacted by the EPA amended Clean Air Act (discussed below). With the addition of the autoclave, the
Company believes it owns one of only approximately ten permitted commercial treatment facilities in the country capable of
treating all types of medical waste.
In November 2005 and September 2009, the EPA and the Texas Commission on Environmental Quality promulgated new
regulations under the Clean Air Act and associated state statutes which will affect the operations of the incineration facility
located in Carthage, Texas. These regulations modify the emission limits and monitoring procedures required to operate an
incineration facility. The new rules will necessitate changes to the Company’s owned incinerator and pollution control
equipment at the facility or require installation of an alternative treatment method to ensure compliance. These regulations
will also require the Company to obtain a Title V permit and conduct additional monitoring. The Company is required to
comply with these new standards by the end of 2012. Such changes will require the Company to incur significant capital
expenditures in order to meet the requirements of the regulations. The Company has studied these amended regulations and
their options, and decided in the interim to move forward with the process of adding alternative technology, autoclaving,
which meets the EPA Clean Air Act requirements, for medical waste disposal which became fully operational in February
2009 at its current facility in Carthage, Texas. Autoclaving is a process that treats regulated waste with steam at high
temperature and pressure to kill pathogens. Combining the autoclaving with a shredding or grinder process allows the waste
to be disposed in a landfill operation. The Company believes autoclaving is environmentally cleaner and a less costly
method of treating medical waste than incineration. Due to its continued growth, the Company anticipates that it will incur
additional capital expenditures needed in order to meet the new air emission regulations. The additional capital expenditures
are not expected to exceed $1.0 million. The Company expects capital expenditures related to these new regulations to be
made by the end of the first half of fiscal year 2013.
23
INFLATION
The Company does not believe that inflation has had a material effect on the results of operations during the past three years.
However, there can be no assurance that the Company’s business will not be affected by inflation in fiscal year 2011 and
beyond.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables set forth selected quarterly information for fiscal years 2009 and 2010. We believe that all necessary
adjustments have been included in the amounts below to present fairly the results of such periods (in thousands except per
share amounts).
Total revenues
Cost of revenues
Operating income (loss)
Net income
Net income per share - diluted
Weighted average shares-diluted
September 30,
2008
$
$
$
$
$
4,270
2,420
610
605
0.04
13,704
Quarter Ended
December 31,
2008
$
$
$
$
$
3,370
2,081
(233)
1,585
0.11
13,840
March 31,
2009
$
$
$
$
$
5,971
2,436
1,984
1,330
0.09
14,084
June 30, 2009
$
6,687
$
2,903
$
1,103
$
677
$
0.05
14,355
Total revenues
Cost of revenues
Operating income (loss)
Net income (loss)
Net income (loss) per share - diluted
Weighted average shares-diluted
Quarter Ended
September 30,
2009
$
$
$
$
$
15,379
4,488
8,982
5,819
0.40
14,527
December 31,
2009
$
$
$
$
$
15,985
5,327
8,439
5,617
0.38
14,883
March 31,
2010
$
$
$
$
$
3,639
2,756
(1,439)
(975)
(0.07)
14,585
June 30, 2010
$
4,152
$
2,930
$
(1,584)
$
(1,105)
(0.07)
$
14,779
CRITICAL ACCOUNTING POLICIES
Revenue Recognition: The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-
element arrangements. Under this guidance, certain products offered by the Company have revenue producing components
that are recognized over multiple delivery points (Sharps® Recovery System™ (formerly the Sharps Disposal by Mail
Systems®) and various TakeAway™ Environmental Return System referred to as “Mailbacks” and Sharps ® Pump and
Asset Return System, referred to as “Pump Returns”) and can consist of up to three separate elements, or units of measure, as
follows: (1) the sale of the compliance and container system, (2) return transportation and (3) treatment service. The
individual fair value of the transportation and treatment services are determined by the sales price of the service offered by
third parties, with the fair value of the compliance and container being the residual value. Revenue for the sale of the
compliance and container is recognized upon delivery to the customer, at which time the customer takes title and assumes
risk of ownership. Transportation revenue is recognized when the customer returns the compliance and container system and
the container has been received at the Company’s facility. The compliance and container system is mailed to the Company’s
facility using the USPS and UPS. Treatment revenue is recognized upon the destruction or conversion and proof of receipt
and treatment having been prepared on the container. Since the transportation element and the treatment elements are
undelivered services at the point of initial sale of the compliance and container, transportation and treatment revenue is
deferred until the services are performed. The current and long-term portions of deferred revenues are determined through
regression analysis and historical trends. Furthermore, through regression analysis of historical data, the Company has
24
determined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a
portion of the transportation and treatment elements are recognized at the point of sale.
On July 1, 2010, the Company adopted ASU No. 2009-13 which further clarifies guidance on revenue recognition for
multiple-deliverable revenue arrangements. This guidance requires an evaluation of all deliverables in an arrangement to
determine whether they represent separate units of accounting, both at the inception of the arrangement and as each item in
the arrangement is delivered. The updated guidance also addresses how arrangement consideration should be allocated to
the separate units of accounting. However, it does not change the timing of revenue recognition or manner of revenue
recognition for a given unit of accounting.
The Company has reviewed each of the potential revenue producing components (the compliance and container system, the
transportation revenue and the treatment revenue) and determined that there will be no change in the units of accounting.
ASU No. 2009-13 establishes a new selling price hierarchy for allocating value to the units of accounting. Under this
relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for separate units
of accounting. The actual consideration received in a multiple-deliverable arrangement is then allocated to the units based
on their relative sales price. Because an estimated selling price must be set for each unit, the residual method used
previously by the Company to allocate consideration to the compliance and container system is no longer allowed. The
selling price for the transportation revenue and the treatment revenue, which utilized third party evidence, did not change
from the prior method. The Company estimated the selling price of the compliance and container system based on the
product and services provided including compliance with local, state and Federal laws, adherence to stringent manufacturing
and testing requirements, safety to the patient and the community as well as storage and containment capabilities. The
Company has calculated the change in revenue assigned to each of the units of accounting under the relative selling price
methodology as compared to using the residual allocation method and determined that the change is not material.
The Company has determined that the implementation of ASU No. 2009-13 will not have a material effect on the
consolidated financial statements when compared to its previous revenue recognition methodology. Additional disclosures
required by ASU No. 2009-13 will be included in the Company’s interim and annual reports for the year ending June 30,
2011.
Stock-Based Compensation: The Company accounts for stock-based compensation under guidance which establishes
accounting for equity instruments exchanged for employee services. Under this guidance, stock-based compensation cost is
measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the
employee’s requisite service period (generally the vesting period of the equity grant). Total stock-based compensation
expense for the fiscal years ended June 30, 2010 and June 30, 2009, was $980 thousand ($52 thousand included in cost of
revenues and $928 thousand included in general and administrative expenses in the Company’s consolidated statement of
operations) and $704 thousand (included in general and administrative expenses in the Company’s consolidated statement of
operations), respectively. The guidance requires any reduction in taxes payable resulting from tax deductions that exceed the
recognized tax benefit associated with compensation expense (excess tax benefits) to be classified as financing cash flows
and as an increase to additional paid in capital. The Company included $1.1 million and $15 thousand of excess tax benefits
in our cash flows from financing activities for the fiscal years ended June 30, 2010 and June 30, 2009, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2009, the FASB Emerging Issue Task Force issued ASU No. 2009-13 which further clarifies revenue recognition
for multiple-deliverable revenue arrangements. See further description of the guidance and its impact under “Revenue
Recognition” in Critical Accounting Policies above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide the
information required by the Item.
25
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the notes thereto, and the related report of the Company’s
independent registered public accounting firm thereon are referenced as pages F-1 to F-20 and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Exchange
Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and forms, and that such information is
accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), as appropriate, to allow timely decisions regarding required disclosure. The Company conducted an evaluation (the
"Evaluation"), under the supervision and with the participation of the CEO and CFO, of the effectiveness of the design and
operation of our disclosure controls and procedures ("Disclosure Controls") as of June 30, 2010 pursuant to Rules 13a-15(e)
and 15d-15(e) of the Exchange Act. Based on this Evaluation, the CEO and CFO concluded that our Disclosure Controls
were effective as of June 30, 2010.
Changes in Internal Controls
During the quarter ended June 30, 2010, there were no changes in the Company’s internal controls over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), that have materially affected, or are reasonably likely to
materially affect the Company’s internal control over financial reporting.
CEO and CFO Certifications
Appearing immediately following the Signatures section of this report are certifications of the CEO and the CFO. The
Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certifications). This Item of this Annual Report on Form 10-K, which you are currently reading is the information
concerning the Evaluation referred to in the Section 302 Certifications and this information, should be read in conjunction
with the Section 302 Certifications for a more complete understanding of the topics presented.
Management's Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company's internal control over
financial reporting is a process designed to provide reasonable assurance to our management and board of directors
regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in
accordance with accounting principles generally accepted in the United States.
The internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All
internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and
the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide
only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of
26
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the internal control over financial reporting as of June 30, 2010.
In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on the assessment, the Company’s management
concluded that, as of June 30, 2010, the Company's internal control over financial reporting was effective based on those
criteria.
The Company’s internal control over financial reporting as of June 30, 2010 has been audited by UHY LLP, an independent
registered public accounting firm, as stated in their report which appears herein.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the information under the caption
“Management” of the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A with the SEC relating to
its Annual Meeting of Stockholders to be held on November 18, 2010.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, as amended, requires the Company’s executive officers and directors, and persons who
beneficially own more than 10% of the Company’s equity securities, to file reports of security ownership and changes in such
ownership with the SEC. Officers, directors and greater than 10% beneficial owners also are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company, during the
fiscal year ended June 30, 2010, all Section 16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
The Audit Committee
The Audit Committee is comprised of certain directors of the Company who are not employees of the Company or any of its
subsidiaries. Messrs. Parker (Chairman), Zerrillo and Dalton are the current members of the Audit Committee. The Audit
Committee, among other things, meets with the independent auditors and management representatives, recommends to the
Board of Directors appointment of independent auditors, approves the scope of audits, interim reviews and other services to
be performed by the independent auditors, approves in advance all permissible non-audit services, considers whether the
performance of any professional services by the auditors other than services provided in connection with the audit function
could impair the independence of the auditors and reviews the results of audits and interim reviews and the accounting
principles applied in financial reporting and financial and operational controls. The independent auditors have unrestricted
access to the Audit Committee and vice versa.
The Board of Directors
The Company’s Board of Directors has determined that Mr. Parker is an independent director who qualifies as an audit
committee financial expert, as that term is defined in Item 407(d)(5)(ii) of Regulation S-K.
The Company’s Board of Directors adopted a Code of Ethics for all of our directors, officers and employees, as defined in
Item 406 under the Securities Act of 1933, as amended. The Company’s Code of Ethics was previously an exhibit to the
Annual Report on Form 10-K. Individuals may also request a free copy of the Company’s Code of Ethics from the
27
Company’s investor relations department. Additionally, the Company posted its Code of Ethics on its website
(www.sharpsinc.com). The Company intends to disclose any amendments to, or waivers from, the provisions of its Code of
Ethics within four business days of the amendment or waiver within Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information under the captions
“Management” and “Executive Compensation” of the Registrant’s definitive Proxy Statement to be filed pursuant to
Regulation 14A with the SEC, relating to its Annual Meeting of Stockholders to be held on November 18, 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the information under the captions “Security
Ownership of Management” and “Certain Beneficial Owners” of the Registrant’s definitive Proxy Statement to be filed
pursuant to Regulation 14A with the SEC, relating to its Annual Meeting of Stockholders to be held on November 18 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the information under the caption “Certain
Relationships and Related Transactions” of the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation
14A with the SEC, relating to its Annual Meeting of Stockholders to be held on November 18, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be
filed pursuant to Regulation 14A with the SEC relating to its Annual Meeting of Stockholders to be held on November 18,
2010.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
Number
2.1
3.1
3.2
3.3
3.4
3.5
4.1
4.2
Description of Exhibit
Agreement and Plan of Reorganization between U.S. Medical Systems, Inc., Sharps Compliance,
Inc. and its Stockholders, dated February 27, 1998 (incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K, filed March 5, 1998).
Bylaws of Company (incorporated by reference from Exhibit 3.4 to Form 10-KSB, dated June 30,
1994).
Amended and Restated Certificate of Incorporation of U.S. Medical Systems, Inc. (incorporated
by reference from Exhibit 3.5 to the Registrant’s Transition Report on Form 10KSB40 filed on
September 29, 1998).
Certificate of Elimination of the Series A 10% Voting Convertible Preferred Stock of Sharps
Compliance Corp. (incorporated by reference from Exhibit 3.6 to Form 10-KSB, filed September
29, 1998).
Bylaws of Sharps Compliance Inc (herein referred to as the Corporation) dated May 23, 1994
(incorporated by reference from Exhibit 3.1 to Form 8-K, filed May 10, 2010)
Bylaws of Sharps Compliance Corp (incorporated by reference from Exhibit 3.2 to Form 8-K,
filed May 10, 2010).
Specimen Stock Certificate (incorporated by reference from Exhibit 4.4 to Form-10-KSB, filed
September 29, 1998).
See Exhibits 3.1, 3.2 and 3.3 for provisions of the Bylaws of the Company, the Articles of
28
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Incorporation of the Company and the Certificate of Elimination defining the rights of holders of
common shares.
Employment Agreement by and between Sharps Compliance Corp. and Dr. Burt Kunik effective
January 1, 2003 (incorporated by reference from Exhibit 10.35 to Form 10-QSB, filed February
13, 2003).*
Executive Employment Agreement by and between Sharps Compliance Corp. and Ronald E.
Pierce dated July 14, 2003 (incorporated by reference to Exhibit 10.2 to the Registrant’s Annual
Report on Form 10-KSB, filed September 26, 2003).*
Executive Employment Agreement by and between Sharps Compliance Corp. and David P. Tusa
dated July 14, 2003 (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report
on Form 10-KSB, filed September 26, 2003).*
Executive Employment Agreement by and between Sharps Compliance Corp. and Michael D.
Archer dated July 14, 2003 (incorporated by reference to Exhibit 10.2 to the Registrant’s Annual
Report on Form 10-KSB, filed September 26, 2003).*
Exclusive Distributorship Agreement between Pro-Tec Containers, Inc. and Sharps Compliance,
Inc., dated April 1, 1998 (incorporated by reference from Exhibit 10.31 to Form 10-KSB, filed
September 29, 1998).
Purchase Agreement between Ivy Green Corporation and Sharps Compliance, Inc., dated June 19,
1998 (incorporated by reference from Exhibit 10.32 to Form 10-KSB, filed September 29, 1998).
Lease Agreement between Lakes Technology Center, Ltd. and Sharps Compliance, Inc., dated
August 1, 1998 (incorporated by reference from Exhibit 10.33 to Form 10-KSB, filed September
29, 1998).
Severance Agreement between C. Lee Cooke, Jr. and Sharps Compliance Corp. (formerly known
as U.S. Medical Systems, Inc.), dated September 2, 1998 (incorporated by reference from Exhibit
10.34 to Form 10-KSB, filed September 29, 1998).
Employment Agreement Amendment by and between Sharps Compliance Corp. and David P.
Tusa dated June 21, 2004 (incorporated by reference from Exhibit 991 to Form 10-QSB, filed
November 12, 2004).*
Employment Agreement Amendment by and between Sharps Compliance Corp. and David P.
Tusa dated August 19, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K, filed August 24, 2005).*
Credit Agreement dated March 27,2006, by and between Sharps Compliance Corp. and JPMorgan
Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K, filed March 28, 2006).
Line of Credit Note dated March 27, 2006, by and between Sharps Compliance Corp. and
JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K, filed March 28, 2006).
Security Agreement dated March 27, 2006, by and between Sharps Compliance Corp. and
JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K, filed March 28, 2006).
Lease Agreement dated as of July 13, 2006, between Sharps Compliance, Inc. and Warehouse
Associates Corporate Centre Kirby II, Ltd. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed July 14, 2006).
Lease Termination Agreement dated as of July 13, 2006, between Sharps Compliance, Inc.,
Warehouse Associates Corporate Centre Kirby, Ltd. and Warehouse Associates Corporate Centre
Kirby II, Ltd. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K, filed July 14, 2006).
Amendment to Credit Agreement dated February 5, 2007, by and between Sharps Compliance
Corp. and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed February 5, 2007).
Note Modification Agreement dated February 5, 2007, by and between Sharps Compliance Corp.
and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K, filed February 5, 2007).
29
10.18
10.19
10.20
10.21
Restricted Stock Award Agreement dated July 2, 2007, by and between Sharps Compliance Corp.
and Ramsay Gillman (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K, filed July 2, 2007).
Letter Agreement by and between Sharps Compliance Corp. and David C. Mayfield dated April
10, 2007 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-
K, filed April 10, 2007).*
Letter Agreement by and between Sharps Compliance Corp. and Claude A. Dance dated
December 26, 2007 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report
on Form 8-K, filed December 26, 2007).*
Letter Agreement by and between Sharps Compliance Corp. and Al Aladwani dated March 24,
2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K,
filed March 12, 2008).*
10.22
Form of Restricted Stock Award Agreement dated June 9, 2008 (incorporated by reference to
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed June 9, 2008).
10.23
10.24
10.25
10.26
10.27
Employment Agreement by and between Sharps Compliance Corp. and John Grow dated October
27, 2008 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-
K, filed October 31, 2008).*
Lease Agreement dated as of January 30, 2009, between Sharps Compliance, Inc. and Investors,
LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K,
filed February 3, 2009).
Lease Agreement dated as of January 30, 2009, between Sharps Compliance, Inc. and Park 288
Industrial, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K, filed February 3, 2009).
Separation Agreement and Mutual Release of all Claims dated as of April 27, 2009 between
Sharps Compliance, Inc. and John Grow (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed May 1, 2009).*
Amended Lease Agreement dated as of May 27, 2009, between Sharps Compliance, Inc. and Park
288 Industrial, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K, filed June 2, 2009).
10.28
Sharps Compliance Corp. 1993 Stock Plan, as amended (incorporated by reference from Annex A
10.29
10.30
10.31
10.32
10.33
10.33
10.34
10.35
of the Registrant’s Proxy Statement on Schedule 14A, filed October 21, 2008).
Second Amendment to Lease Agreement between Sharps Compliance, Inc. and Warehouse
Associates Corporate Centre Kirby II, ltd. (incorporate by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed March 9, 2010).
Amendment to Credit Facility dated March 10, 2010, by and between Sharps Compliance Inc. and
JP Morgan Chase, N.A. (incorporate by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K, filed March 11, 2010.
Note Modification Agreement dated March 10,2010, by and between Sharps Compliance Inc. and
JP Morgan Chase, N.A. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K, filed March 11, 2010.
Employment Agreement by and between Sharps Compliance Corp. and David P. Tusa dated
June 14, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K, filed June 14, 2010).*
Employment Agreement by and between Sharps Compliance Corp. and Diana P. Diaz dated
June 14, 2010 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
June 14, 2010).*
Contract No. V797P-DSNS-9005 dated January 29, 2009 by and between the Department of Vetera
and Sharps Compliance Corp. (incorporated by reference to Exhibit 10.1 to the Registrant's Current
filed June 25, 2010)**.
Credit Agreement dated July 15, 2010, by and Sharps Compliance, Inc. and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K, filed July 19, 2010).
Line of Credit Note dated July 15, 2010, by and between Sharps Compliance, Inc. and Wells
30
Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K, filed July 19, 2010).
14.10
Sharps Compliance Corp. Code of Ethics (incorporated by reference to Exhibit 14.1 to the
21.1
23.1
31.1
Registrant’s Current report on Form 10-KSB, filed September 20, 2004.
Subsidiaries of Sharps Compliance Corp. (filed herewith).
Consent of UHY LLP (filed herewith).
Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley
Act (filed herewith).
31.2
Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act
(filed herewith).
32.1
Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley
Act (filed herewith).
32.2
Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act
(filed herewith).
*
**
This exhibit is a management contract or a compensatory plan or arrangement.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
31
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: August 26, 2010
SHARPS COMPLIANCE CORP.
By: /s/ BURTON J. KUNIK
Dr. Burton J. Kunik
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: August 26, 2010
Dated: August 26, 2010
Dated: August 26, 2010
Dated: August 26, 2010
Dated: August 26, 2010
Dated: August 26, 2010
Dated: August 26 2010
Dated: August 26, 2010
By: /s/ BURTON J. KUNIK
Dr. Burton J. Kunik
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ DAVID P. TUSA
David P. Tusa
President
By: /s/ DIANA P. DIAZ _
Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ F. GARDNER PARKER
F. Gardner Parker
Lead Independent Director
By: /s/ JOHN W. DALTON
John W. Dalton
Director
By: /s/ RAMSAY GILLMAN
Ramsay Gillman
Director
By: /s/ PARRIS H. HOLMES, JR.
Parris H. Holmes, Jr.
Director
By: /s/ PHILIP C. ZERRILLO
Philip C. Zerrillo
Director
32
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Reports of Independent Registered Public Accounting Firm ...................................................................
F-2
Consolidated Balance Sheets as of June 30, 2010 and 2009 ...................................................................
F-4
Consolidated Statements of Income for the Years Ended June 30, 2010
and 2009 ..............................................................................................................................................
F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended
June 30, 2010 and 2009 .......................................................................................................................
F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 2010 and 2009 ..........................
F-7
Notes to Consolidated Financial Statements ............................................................................................
F-8
F- 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sharps Compliance Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sharps Compliance Corp. (a Delaware
corporation) and subsidiaries (collectively, the “Company”) as of June 30, 2010 and 2009, and the related
consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Sharps Compliance Corp. and subsidiaries as of June 30, 2010 and 2009, and the
consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of Sharps Compliance Corp. and subsidiaries’ internal control over financial reporting as of
June 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 26, 2010 expressed
an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ UHY LLP
Houston, Texas
August 26, 2010
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Sharps Compliance Corp.
We have audited Sharps Compliance Corp. (a Delaware corporation) and subsidiaries’ internal control over financial
reporting as of June 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in Part II, Item 9A of this Form 10-K. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United Sates). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Sharps Compliance Corp. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2010, based on criteria established in Internal Control – Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Sharps Compliance Corp. and subsidiaries as of June 30, 2010 and 2009,
and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended, and
our report dated August 26, 2010 expressed an unqualified opinion on those consolidated financial statements.
/s/ UHY LLP
Houston, Texas
August 26, 2010
F-3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value amounts)
ASSETS
June 30,
2010
2009
CURRENT ASSETS
Cash and cash equivalents…………………………………………………………
Accounts receivable, net of allowance for doubtful accounts of $21 and
$17, respectively…………………………………………………………………
Inventory……………………………………………………………………………
Prepaids and other current assets……………………………………………………
Deferred income taxes………………………………………………………………
TOTAL CURRENT ASSETS……………………………………………………
$
18,068
2,033
1,738
3,369
83
25,291
PROPERTY, PLANT AND EQUIPMENT, net……………………………………
5,631
DEFERRED INCOME TAXES, non-current………………………………………
INTANGIBLE ASSETS, net of accumulated amortization of $196 and
$168, respectively…………………………………………………………………
503
207
$
4,792
1,606
2,283
776
17
9,474
3,445
2,121
148
TOTAL ASSETS……………………………………………………………………
$
31,632
$
15,188
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable……………………………………………………………………
Accrued liabilities…………………………………………………………………
Deferred revenue……………………………………………………………………
TOTAL CURRENT LIABILITIES………………………………………………
$
1,220
1,079
1,375
3,674
LONG-TERM DEFERRED REVENUE……………………………………………
RENT ABATEMENT………………………………………………………………
583
434
$
2,499
1,188
1,221
4,908
625
85
TOTAL LIABILITIES……………………………………………………………
4,691
5,618
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value per share; 20,000,000 shares authorized;
14,891,754 and 13,257,507 shares issued and outstanding, respectively………
Additional paid-in capital…………………………………………………………
Retained earnings (deficit)…………………………………………………………
TOTAL STOCKHOLDERS' EQUITY……………………………………………
149
19,705
7,087
26,941
133
11,706
(2,269)
9,570
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY………………………
$
31,632
$
15,188
See accompanying notes to consolidated financial statements
F-4
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share data)
Year Ended June 30,
2010
2009
REVENUES………………………………………………………………
$
39,156
COSTS AND EXPENSES
Cost of revenues…………………………………………………………
Selling, general and administrative……………………………………
Depreciation and amortization…………………………………………
TOTAL COSTS AND EXPENSES…………………………………
15,502
8,815
441
24,758
OPERATING INCOME …………………………………………………
14,398
OTHER INCOME
Interest income…………………………………………………………
Other income ……………………………………………………………
TOTAL OTHER INCOME……………………………………………
37
-
37
$
20,297
9,841
6,604
388
16,833
3,464
27
6
33
INCOME BEFORE INCOME TAXES…………………………………
14,435
3,497
INCOME TAX EXPENSE (BENEFIT)
Current…………………………………………………………………
Deferred…………………………………………………………………
TOTAL INCOME TAX EXPENSE (BENEFIT)……………………
3,528
1,551
5,079
121
(821)
(700)
NET INCOME……………………………………………………………
$
9,356
NET INCOME PER COMMON SHARE
Basic……………………………………………………………………
$
0.66
Diluted…………………………………………………………………
$
0.63
$
4,197
$
0.33
$
0.30
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
INCOME PER COMMON SHARE:
Basic……………………………………………………………………
Diluted…………………………………………………………………
14,176
14,952
12,908
13,996
See accompanying notes to consolidated financial statements
F-5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
(Deficit)
Total
Stockholders'
Equity
Balances, June 30, 2008
12,580,183
$
126
$
9,225
$
(6,466)
$
2,885
Exercise of stock options
435,100
Change in valuation
allowance related to tax
benefits of stock
compensation
Stock-based
compensation
-
-
Issuance of restricted stock
242,224
Excess tax benefit from
stock-based award
activity
Net Income
-
-
4
-
-
3
-
-
447
1,318
704
(3)
15
-
Balances, June 30, 2009
13,257,507
133
11,706
Issuance of Common Stock,
net of direct expenses
Exercise of stock options
577,146
972,874
Stock-based
compensation
Issuance of restricted stock
84,227
Excess tax benefit from
stock-based award
activity
Net Income
-
-
6
9
1
-
-
4,867
1,064
980
(1)
1,089
-
-
-
-
-
4,197
(2,269)
-
-
-
-
-
451
1,318
704
-
15
4,197
9,570
4,873
1,073
980
-
1,089
-
9,356
9,356
Balances, June 30, 2010
14,891,754
$
149
$
19,705
$
7,087
$
26,941
See accompanying notes to consolidated financial statements
F-6
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended June 30,
2010
2009
$
9,356
CASH FLOWS FROM OPERATING ACTIVITIES
Net income……………………………………………………………………
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization………………………………………………
Stock- based compensation expense…………………………………………
Excess tax benefits from stock-based award activity………………………
Deferred tax expense (benefit)………………………………………………
Changes in operating assets and liabilities:
Increase in accounts receivable, net…………………………………………
Decrease (increase) in inventory……………………………………………
Increase in prepaid and other current assets…………………………………
Increase in accounts payable and accrued liabilities……………………..
Increase in deferred revenue…………………………………………………
NET CASH PROVIDED BY OPERATING ACTIVITIES………………
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment………………………………………
Additions to intangible assets………………………………………………
NET CASH USED IN INVESTING ACTIVITIES…………………………
.
CASH FLOWS FROM FINANCING ACTIVITIES
Excess tax benefits from stock-based award activity………………………
Proceeds from stock offering, net of direct expenses………………………
Proceeds from exercise of stock options……………………………………
NET CASH PROVIDED BY FINANCING ACTIVITIES…………………
NET INCREASE IN CASH AND CASH EQUIVALENTS
796
980
(1,089)
1,551
(427)
545
(2,592)
50
112
9,282
(2,954)
(87)
(3,041)
1,089
4,873
1,073
7,035
13,276
$
4,197
418
704
(15)
(821)
(392)
(1,701)
(435)
2,576
266
4,797
(2,461)
(45)
(2,506)
15
-
451
466
2,757
2,035
$
4,792
CASH AND CASH EQUIVALENTS, beginning of year……………………
4,792
CASH AND CASH EQUIVALENTS, end of year……………………………
$
18,068
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid
$
5,656
$
11
See accompanying notes to consolidated financial statements
F-7
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 1 - ORGANIZATION AND BACKGROUND
Organization: The accompanying consolidated financial statements include the financial transactions and accounts
of Sharps Compliance Corp. and its wholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps
Compliance, Inc.), Sharps e-Tools.com, Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc., Sharps Environmental
Services, Inc. (dba Sharps Environmental Services of Texas, Inc.) and Sharps Safety, Inc. (collectively, “Sharps” or
the “Company”). All significant intercompany accounts and transactions have been eliminated upon consolidation.
Business: Sharps is a leading full-service provider of cost-effective management solutions for medical waste and
unused dispensed medications generated outside the hospital and large health care facility setting. These solutions
include Sharps® Recovery System™ (formerly Sharps Disposal by Mail System®), TakeAway™ Recovery System,
TakeAway™ Environmental Return System, Rx TakeAway™ Recovery and Reporting System, Sharps®MWMS™,
GREEN Waste Conversion Process™ that transforms treated medical waste into a new product called PELLA-
DRX™, Pitch-It™ IV Poles, Trip LesSystem®, Sharps® Pump and Asset Return System, Sharps Secure® Needle
Recovery System, Sharps SureTemp Tote®, IsoWash® Linen Recovery System, Biohazard Spill Clean-Up Kit and
Disposal System, Sharps e-Tools, Sharps Environmental Services and Sharps Consulting.
Concentration of Customers and Service Providers: Although Sharps has experienced growth in revenues over the
past few years, there is an inherent concentration of credit risk associated with accounts receivable arising from sales
to its major customers. For the fiscal year ended June 30, 2010, two customers represented approximately 68% of
revenues. Those same two customers represented approximately 27%, or $546 thousand, of the total accounts
receivable balance at June 30, 2010. For the fiscal year ended June 30, 2009, four customers represented
approximately 48% of revenues. Those same four customers represented approximately 28%, or $504 thousand, of
the total accounts receivable balance at June 30, 2009. The Company may be adversely affected by its dependence
on a limited number of high volume customers. Management believes that the risks are mitigated by, (i) the
contractual relationships with key customers, (ii) the high quality and reputation of the Company and its products and
(iii) the continued diversification of the Company’s products and services into additional markets outside of its
traditional health care customer base.
Currently, the majority of Sharps transportation is sourced with the United States Postal Service (“USPS”), which
consists of delivering the Sharps® Recovery System™ (formerly Sharps Disposal by Mail System®) from the end
user to the Company’s facility. The Company also has an arrangement with United Parcel Service Inc. (“UPS”)
whereby UPS transports the Company’s TakeAway™ Recovery System products from the end user to the
Company’s facility. The Company began selling a UPS product to select customers in fiscal year 2007. Management
believes the risk of dependence on the USPS is mitigated by (i) the new arrangement with UPS and (ii) the long-
standing business relationship with the USPS.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or
less at the time of purchase to be cash equivalents.
The Company maintains funds in bank accounts that, at times, may exceed the limit insured by the Federal Deposit
Insurance Corporation (“FDIC”).
F-8
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company also maintains funds in money market funds, which are triple A rated by Standard & Poor’s and not
insured by the FDIC. The risk of loss attributable to these uninsured balances is mitigated by depositing funds only
in high credit quality financial institutions. The Company has not experienced any losses in such accounts.
Accounts Receivable: Accounts receivable consist primarily of amounts due to us from our 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. We maintain an allowance for doubtful accounts to reflect the expected
uncollectibility of 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 we have
determined 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.
Inventory: Inventory consists primarily of finished goods and supplies held for sale and are stated at the lower of
cost or market using the average cost method. At June 30, 2010, total inventory was $1.7 million of which $933
thousand was finished goods and $805 thousand was raw materials. At June 30, 2009 total inventory was $2.3
million of which $1.2 million was finished goods and $1.1 million was raw materials.
Property and Equipment: Property and equipment, including third party software and implementation costs, is stated
at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the
estimated useful lives of the assets. Additions, improvements and renewals significantly adding to the asset value or
extending the life of the asset are capitalized. Ordinary maintenance and repairs, which do not extend the physical or
economic life of the property or equipment, are charged to expense as incurred. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or
loss is reflected in the results of operations for the period.
Computer and software development costs, which include costs of computer software developed or obtained for
internal use, all programming, implementation, and costs incurred with developing internal-use software, are
capitalized during the development project stage. External direct costs of materials and services consumed in
developing or obtaining internal-use computer software are capitalized.
The Company expenses costs associated with developing or obtaining internal-use software during the preliminary
project stage. Training and maintenance costs associated with system changes or internal-use software are expensed
as incurred. Additionally, the costs of data cleansing, reconciliation, balancing of old data to the new system,
creation of new/additional data and data conversion costs are expensed as incurred.
During the fiscal years ended June 30, 2010 and 2009, the Company recorded depreciation expense of $768
thousand and $392 thousand, respectively.
Intangible Assets: Intangible assets consist of, (i) permit costs related to the Company’s incineration facility in
Carthage, Texas, (ii) three patents, two acquired in June 1998 and one in November 2003, and (iii) defense costs
related to certain existing patents. The permit costs are being amortized over the estimated life of the incinerator
facility. The one patent acquired in November 2003 is being amortized over its estimated useful life of seventeen
years. During the fiscal years ended June 30, 2010 and 2009, the Company recorded amortization expense of $28
thousand and $26 thousand, respectively. Accumulated amortization at June 30, 2010 and 2009 was $196 thousand
and $168 thousand, respectively.
F-9
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of June 30, 2010, future amortization of intangible assets is as follows (in thousands):
Year Ending June 30,
2011
2012
2013
2014
2015
Thereafter
$
31
31
17
10
7
111
207
$
Stock-Based Compensation: The Company accounts for stock-based compensation under guidance which
establishes accounting for equity instruments exchanged for employee services. Under this guidance, stock-based
compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as
an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Total
stock-based compensation expense for the fiscal years ended June 30, 2010 and June 30, 2009, was $980 thousand
($52 thousand included in cost of revenues and $928 thousand included in general and administrative expenses in the
Company’s consolidated statement of operations) and $704 thousand (included in general and administrative
expenses in the Company’s consolidated statement of operations), respectively. The guidance requires any reduction
in taxes payable resulting from tax deductions that exceed the recognized tax benefit associated with compensation
expense (excess tax benefits) to be classified as financing cash flows and as an increase to additional paid in capital.
The Company included approximately $1.1 million and $15 thousand of excess tax benefits in our cash flows from
financing activities for the fiscal years ended June 30, 2010 and June 30, 2009, respectively.
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input
assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected
option term, the expected volatility of the Company’s stock over the option’s expected term, the risk free interest rate
over the option’s expected term, and the Company’s expected annual dividend yield. The risk free interest rate is
derived using the U.S. Treasury yield curve in effect at date of grant. Volatility, expected life and dividend yield are
based on historical experience and activity. The Company believes that the valuation technique and the approach
utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock
options granted during the fiscal year ended June 30, 2010. Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by persons who receive equity awards.
The fair value of the Company’s stock options was estimated on the grant date using the Black-Scholes option-
pricing model with the following assumptions:
Weighted average risk-free interest rate
Weighted average expected volatility
Weighted average expected life (in years)
Dividend yield
Year Ended June 30,
2010
0.9%
68%
3.55
-
2009
2.1%
61%
3.09
-
F-10
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
For stock-based awards granted on or after July 1, 2006, the Company considers an estimated forfeiture rate for
stock options and RSUs based on historical experience and the anticipated forfeiture rates during the future contract
life.
Revenue Recognition: The Company recognizes revenue in accordance with guidance on revenue recognition of
multiple-element arrangements. Under this guidance, certain products offered by the Company have revenue
producing components that are recognized over multiple delivery points (Sharps® Recovery System™ (formerly the
Sharps Disposal by Mail Systems®) and various TakeAway™ Environmental Return Systems referred to as
“Mailbacks” and Sharps Pump Return Boxes, referred to as “Pump Returns”) and can consist of up to three separate
elements, or units of measure, as follows: (1) the sale of the compliance and container system, (2) return
transportation and (3) treatment service. The individual fair value of the transportation and treatment services are
determined by the sales price of the service offered by third parties, with the fair value of the compliance and
container being the residual value. Revenue for the sale of the compliance and container is recognized upon delivery
to the customer, at which time the customer takes title and assumes risk of ownership. Transportation revenue is
recognized when the customer returns the compliance and container system and the container has been received at
the Company’s facility. The compliance and container system is mailed to the Company’s facility using the USPS
and UPS. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment
having been prepared on the container. Since the transportation element and the treatment elements are undelivered
services at the point of initial sale of the compliance and container, transportation and treatment revenue is deferred
until the services are performed. The current and long-term portions of deferred revenues are determined through
regression analysis and historical trends. Furthermore, through regression analysis of historical data, the Company
has determined that a certain percentage of all compliance and container systems sold may not be returned.
Accordingly, a portion of the transportation and treatment elements are recognized at the point of sale.
On July 1, 2010, the Company adopted ASU No. 2009-13 which further clarifies guidance on revenue recognition
for multiple-deliverable revenue arrangements. This guidance requires an evaluation of all deliverables in an
arrangement to determine whether they represent separate units of accounting, both at the inception of the
arrangement and as each item in the arrangement is delivered. The updated guidance also addresses how
arrangement consideration should be allocated to the separate units of accounting. However, it does not change the
timing of revenue recognition or manner of revenue recognition for a given unit of accounting.
The Company has reviewed each of the potential revenue producing components (the compliance and container
system, the transportation revenue and the treatment revenue) and determined that there will be no change in the
units of accounting.
ASU No. 2009-13 establishes a new selling price hierarchy for allocating value to the units of accounting. Under
this relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for
separate units of accounting. The actual consideration received in a multiple-deliverable arrangement is then
allocated to the units based on their relative sales price. Because an estimated selling price must be set for each unit,
the residual method used previously by the Company to allocate consideration to the compliance and container
system is no longer allowed. The selling price for the transportation revenue and the treatment revenue, which
utilized third party evidence, did not change from the prior method. The Company estimated the selling price of the
compliance and container system based on the product and services provided including compliance with local, state
and Federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the
community as well as storage and containment capabilities. The Company has calculated the change in revenue
assigned to each of the units of accounting under the relative selling price methodology as compared to using the
residual allocation method and determined that the change is not material.
The Company has determined that the implementation of ASU No. 2009-13 will not have a material effect on the
consolidated financial statements when compared to its previous revenue recognition methodology. Additional
disclosures required by ASU No. 2009-13 will be included in the Company’s interim and annual reports for the year
ending June 30, 2011.
F-11
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Shipping and Handling Fees and Costs: The Company records amounts billed to customers for shipping and
handling as revenue. Costs incurred by the Company for shipping and handling have been classified as cost of
revenues.
Additional Product Related Costs: The Company records inbound shipping, purchasing and receiving costs,
inspection costs, warehousing costs and other product related costs as cost of revenues.
Advertising Costs: Advertising costs are charged to expenses when incurred and totaled $365 thousand and $46
thousand for the fiscal years ended June 30, 2010 and 2009, respectively.
Realization of Long-lived Assets: The Company evaluates the recoverability of property and equipment and
intangible or other assets if facts and circumstances indicate that any of those assets might be impaired. If an
evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the
asset’s carrying amount to determine if a write-down to fair value is necessary. No such impairment losses were
recognized during 2010 or 2009.
Employee Benefit Plans: In addition to group health related benefits, the Company maintains a 401(k) employee
savings plan available to all full-time employees. The Company matches a portion of employee contributions with
cash (25% of employee contribution up to 6%). Company contributions to the 401(k) plan were $31 thousand and
$25 thousand for the fiscal years ended June 30, 2010 and 2009, respectively, and are included in selling, general
and administrative expenses. For purposes of the group health benefit plan, the Company self-insures an amount
equal to the excess of the employees’ deductible ($1,000 for individual and $2,000 for family coverage) up to the
amount by which the third party insurance coverage begins ($5,000 for individual and $10,000 for family). The
amount of liability at June 30, 2010 and 2009 was $2 thousand and $9 thousand, respectively, and is included in
“Accrued Liabilities”.
Income Taxes: The liability method is used in accounting for deferred income taxes. Under this method, 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.
Net Income Per Share: Earnings per share (“EPS”) data for all years presented has been computed under guidance
that requires a presentation of basic and diluted EPS. Basic EPS excludes dilution and is determined by dividing
income or loss available to common stockholders by the weighted average number of common shares outstanding
during the period adjusted for preferred stock dividends, if any. Diluted EPS reflects the potential dilution that could
occur if securities and other contracts to issue common stock were exercised or converted into common stock.
Fair Value of Financial Instruments: The Company considers the fair value of all financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, not to be materially
different from their carrying values at year-end due to their short-term nature.
Segment Reporting: The guidance for disclosures about segments of an enterprise requires that a public business
enterprise report financial and descriptive information about its operating segments. Generally, financial information
is required to be reported on the basis used internally for evaluating segment performance and resource allocation.
The Company operates in a single segment, focusing on developing cost-effective management solutions for medical
waste and unused dispensed medications generated outside the hospital and large healthcare facility setting.
Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles
F-12
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
generally accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities and disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ
from these estimates.
Uncertain Tax Positions: The Company classifies interest and penalties associated with the payment of income taxes
in the Other Income (Expense) section of its consolidated statements of income. At June 30, 2010 and 2009, the
Company did not have any uncertain tax positions. Tax return filings which are subject to review by local tax
authorities by major jurisdiction are as follows:
(cid:120) United States – fiscal years ended June 30, 2007, 2008 , and 2009
(cid:120) State of Texas – fiscal years ended June 30, 2006, 2007, 2008, and 2009
(cid:120) State of Georgia – fiscal years ended June 30, 2009
Recent Accounting Pronouncements:
In October 2009, the FASB Emerging Issue Task Force issued ASU No. 2009-13 which further clarifies revenue
recognition for multiple-deliverable revenue arrangements. See further description of the guidance and its impact
under “Revenue Recognition” in Note 2 Summary of Significant Accounting Policies.
Reclassifications: Certain reclassifications have been made in prior period financial statements to conform to current
period presentation. These reclassifications have not resulted in any changes to previously reported net income for
any periods.
NOTE 3 – SUBSEQUENT EVENTS
The Company evaluates events and transactions occurring after the balance sheet date and before the issuance of its
financial statements. The Company evaluated such events and transactions through the date of issuance of the
consolidated financial statements.
On July 15, 2010, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank,
National Association which replaces the credit agreement executed on March 9, 2010 with JPMorgan Chase Bank,
N.A. (the “Prior Credit Agreement”). See further description of the Credit Agreement in Note 5 Notes Payable and
Long-Term Debt.
F-13
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
At June 30, 2010 and 2009, property and equipment consisted of the following (in thousands):
Furniture and fixtures
Plant and equipment
Manufacturing
Computers and software
Leasehold improvements
Land
Less: accumulated depreciation
Useful Life
3 to 5 years
3 to 17 years
15 years
3 to 5 years
3 to 15 years
June 30,
2010
$
166
4,654
222
1,122
872
19
7,055
1,424
2009
$
96
3,083
222
1,022
-
19
4,442
997
Net property, plant and equipment
$
5,631
$
3,445
Total depreciation expense in the fiscal years ended June 30, 2010 and 2009 is $768 thousand and $392 thousand,
respectively. Depreciation expense included in Cost of revenues in the fiscal years ended 2010 and 2009 is $355
thousand and $31 thousand, respectively.
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
On July 15, 2010, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association. The
Credit Agreement replaces the Prior Credit Agreement executed on March 9, 2010 with JPMorgan Chase Bank N.A.
As of the date of issuance of the consolidated financial statements, the Company had no outstanding borrowings,
$105 thousand in letters of credit outstanding, and $4.9 million of credit available.
The Credit Agreement provides for a two-year, $5.0 million line of credit facility, the proceeds of which may be
utilized for: (i) working capital, (ii) capital expenditures, (iii) letters of credit (up to $500,000), (iv) acquisitions (up
to $1,000,000) and (v) general corporate purposes. Unlike the Prior Credit Agreement, there is no borrowing base
computation that limits the amount of borrowings under the Credit Agreement.
Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets. Borrowings bear
interest at either (i) a fluctuating rate per annum equal to LIBOR plus a margin of 250 basis points or (ii) at the
Company’s option, a fixed rate for a 30, 60, or 90 day period set at the option date’s LIBOR plus a margin of 250
basis points. Any outstanding revolving loans, and accrued and unpaid interest, will be due and payable on July 15,
2012, the maturity date of the Credit Agreement. The Company paid a one-time non-refundable commitment fee of
$10,000 applicable to the entire two year term of the Credit Agreement. The Company will pay a fee of 0.2% per
annum on the unused amount of the line of credit. We estimate that the interest rate applicable to the borrowings
under the Credit Agreement would be approximately 3.0% as of June 30, 2010.
The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to
maintain a minimum level of tangible net worth of $21 million and not exceed a ratio of liabilities to tangible net
worth of 1.0 to 1.0. The Company is in compliance with all the financial covenants as of the date of issuance of the
consolidated financial statements. The Credit Agreement also contains customary events of default. Upon the
occurrence of an event of default that remains uncured after any applicable cure period, the lenders’ commitment to
make further loans may terminate and the Company may be required to make immediate repayment of all
F-14
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT (continued)
indebtedness to the lenders. The Credit Agreement expires on July 15, 2012.
The Prior Credit Agreement, which was in effect as of June 30, 2010, provided for a $2.5 million line of credit
secured by substantially all of the Company’s assets. Borrowings bore interest at a fluctuating rate per annum equal
to either, (i) the prime rate (interest per annum announced from time to time by JP Morgan Chase Bank, N.A.) or (ii)
LIBOR plus a margin of 2.75%. The Prior Credit Agreement had a maturity date of March 31, 2012. As of June 30,
2010, no amounts related to the Prior Credit Agreement were outstanding other than the letters of credit of
approximately $105 thousand. Under the Prior Credit Agreement, and based upon the Company’s June 30, 2010
level of accounts receivable and inventory, the amount available to borrow at June 30, 2010 was approximately $1.4
million.
NOTE 6 - INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
Year Ended June 30,
2010
2009
Current
Deferred
Total
Current
Deferred
Total
Federal
$
3,206
$
1,535
$
4,741
$
74
$
(821)
$
(747)
State
322
16
338
47
-
47
$
3,528
$
1,551
$
5,079
$
121
$
(821)
$
(700)
The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years
ended June 30, 2010 and 2009 is as follows:
Statutory rate……………………………………………………
State income taxes, net……………………………………………
Meals and entertainment…………………………………………
Change in valuation allowance…………………………………
AMT benefit from stock-based compensation……………………
Section 199 deduction …………………………………………
Return to provision differences…………………………………
(1) Section 199 refers to Internal Revenue Service deduction for
Income Attributable to Manufacturing Activities
Year Ended June 30,
2010
2009
35.0%
1.3%
0.2%
0.0%
0.0%
(1.0%)
(0.3%)
35.2%
35.0%
0.9%
0.6%
(51.6%)
0.4%
0.0%
(5.3%)
(20.0%)
(1)
For the fiscal years ended June 30, 2010 and 2009, state income taxes relate to the Texas Margin Tax and Georgia
Income Tax. For the fiscal years ended June 30, 2010 and 2009, the Company evaluated the need for the valuation
allowance
F-15
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 6 – INCOME TAXES (continued)
on its deferred tax asset balances. Based on that evaluation, the Company determined that it was more likely than not
that the Company would realize these deferred tax assets and as such the valuation allowance was reduced to zero.
At June 30, 2010 and 2009, significant components of deferred tax assets and liabilities are approximated as follows
(in thousands):
June 30,
2010
2009
Deferred tax assets relating to:
Accounts receivable allowance………………………………..
Accrued vacation……………………………………………….
Deferred revenue…………………………………………………
Professional fees………………………………………………..
Stock compensation……………………………………………..
Net operating loss carryforwards and other credits………….
Total deferred tax assets……………………………………….
7
20
850
56
263
-
1,196
6
13
676
-
104
1,494
2,293
Deferred tax liablities related to depreciation differences…..
(610)
(155)
Net deferred tax assets …………………………………..
$
586
$
2,138
During the year ended June 30, 2010, the net deferred tax asset decreased $1.6 million, primarily due to the
utilization of net operating loss carryforwards. During the year ended June 30, 2010, the Company utilized $3.9
million of net operating loss carryforwards for income tax purposes. In addition, a $0.1 million benefit was recorded
to additional paid in capital which related to excess tax deductions for stock compensation accounted for in
accordance with the FASB’s guidance as it related to stock -based compensation.
NOTE 7 - EQUITY TRANSACTIONS
During the fiscal year ended June 30, 2010, stock options to purchase 972,874 of the Company’s shares of common
shares were exercised. Total proceeds to the Company were approximately $1.1 million (average exercise price of
$1.10 per share). During the fiscal year ended June 30, 2009, stock options to purchase 435,100 of the Company’s
shares common stock were exercised. Total proceeds to the Company were $451 thousand (average exercise price
of $1.04 per share).
In the second quarter of fiscal 2010, the Company completed a public offering of 577,146 shares, of which 77,146
were sold to cover the over-allotment option, at a price of $9.165 per share (net of underwriting commission). The
net proceeds of $4.8 million from the shares sold by the Company (net of direct offering expenses) is expected to be
used for general corporate purposes, including expansion of our product offerings, facilities and infrastructure to
meet the continued expected growth of the Company.
NOTE 8 - STOCK BASED COMPENSATION
The Company sponsors the Sharps Compliance Corp. 1993 Stock Plan (the “Plan”) covering employees, consultants
and non-employee directors. The Plan, as amended, provides for the granting of stock-based compensation (stock
options or restricted stock) up to 4,000,000 shares of the Company’s common stock of which 821,192 shares are
outstanding as of June 30, 2010. The Company also has issued 637,500 non-Plan options to purchase common stock
of which zero are outstanding as of June 30, 2010. Options granted generally vest over a period of three years and
expire seven years after the date of grant. Restricted stock generally vests between one to three years.
F-16
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 8 –STOCK BASED COMPENSATION (continued)
The summary of activity for all stock options during the fiscal years ended June 30, 2010 and 2009 is presented in
the table below (in thousands):
Balance, July 1, 2008………………. #
Granted…………………………… #
Exercised………………………… #
Forfeited or canceled……………. #
Balance, July 1, 2009………………. #
Granted…………………………… #
Exercised………………………… #
Forfeited or canceled……………. #
Balance, June 30, 2010……………… #
Exercisable at June 30, 2010………. #
Options
Outstanding
1,657
206
(435)
(30)
Weighted
Average
Exercise
Price
$
$
$
$
1.10
2.10
1.04
2.82
1,398
416
(973)
(49)
792
360
(1)
$
$
$
$
1.17
7.12
1.10
5.57
$
4.21
(2)
(2)
(1) Excludes 72 thousand shares of Restricted Stock
(2) Excludes 30 thousand shares of Restricted Stock
The summary of activity for all restricted stock during the fiscal years ended June 30, 2010 and 2009 is presented in
the table below (in thousands):
Unvested at beginning of the Year
Granted
Vested
Forfeited
Unvested at end of the Year
June 30,
2010
2009
72
52
(84)
(10)
30
101
307
(242)
(94)
72
The weighted average fair value per share of restricted stock granted during the fiscal year of June 30, 2010 and
2009 was $9.81 and $2.07, respectively. The weighted average fair value per share of restricted stock vested during
the fiscal year of June 30, 2010 and 2009 was $6.78 and $3.35, respectively.
As of June 30, 2010 and 2009, there were 105,173 and 536,006 options, respectively, available for grant under the
Plan.
F-17
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 8 – STOCK – BASED COMPENSATION (continued)
The following table summarizes information about stock options outstanding as of June 30, 2010 (in thousands
except per share amount):
Options Outstanding
Range of Exercise
Price
Outstanding
as of
June 30, 2010
$0.00 - $1.99
$2.00 - $3.99
$4.00 - $5.99
$6.00 - $7.99
$8.00- $10.00
215
186
154
4
233
792
Weighted
Average
Remaining
Life
(in Years)
2.22
5.02
6.96
6.80
6.14
Weighted
Average
Exercise
Price
$
$
$
$
$
$
0.79
2.36
4.46
6.73
8.62
4.21
The following table summarizes information about stock options outstanding and exercisable as of June 30, 2010 (in
thousands except per share amount):
Options Exercisable
Outstanding
and
Exercisable
as of
June 30, 2010
Weighted
Average
Remaining
Life
(in Years)
215
144
-
1
-
360
2.22
5.10
-
6.67
-
Weighted
Average
Exercise
Price
0.79
$
2.29
$
$
-
$
6.60
$
-
$
1.41
Range of Exercise
Price
$0.00 - $1.99
$2.00 - $3.99
$4.00 - $5.99
$6.00 - $7.99
$8.00- $10.00
As of June 30, 2010, there was $862 thousand of stock option and restricted stock compensation expense related to
non-vested awards. This expense is expected to be recognized over a weighted average period of 1.11 years
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases: The Company leases 190,489 square feet of space in Houston, Texas and College Park, Georgia.
The Company recognizes escalating rental payments that are quantifiable at the inception of the lease on a straight-
line basis over the lease term. The leases expire from April 2014 to April 2015 with options to renew the Company’s
leases
F-18
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
for warehouses for 5 years and for office space 10 years. Rent expense for the fiscal years ended June 30, 2010 and
2009 was $1.2 million and $436 thousand, respectively.
Future minimum lease payments under non-cancelable operating leases as of June 30, 2010 are as follows (in
thousands):
Year Ending June 30,
2011
2012
2013
2014
2015
There after
$
1,454
1,491
1,504
1,407
624
-
$
6,480
Former Employee Matters:
In June 2004, the Company provided its then Chief Operating Officer, Mr. Ronald E. Pierce (“Mr. Pierce”) with
notice of non-renewal of his agreement. In July 2008, the Company received a demand for arbitration from Mr.
Pierce related to his termination of employment with a claim amount of $300,001. Upon completion of the
arbitration process (April 23, 2010), the Company received notice that the Arbitration Panel hearing Mr. Pierce’s
employment-related matter ruled in favor of the Company (i.e., no liability of the Company to Mr. Pierce). In July
2010, the Company settled a counter claim against Mr. Pierce related to this matter in exchange for a payment by
Mr. Pierce to the Company in the amount of $12,500.
Other:
Under an agreement with a manufacturing company who produces the Pitch-It™ IV Poles, the Company is subject to
a minimum annual purchase commitment of $600,000 for each subsequent calendar year succeeding the first thirteen
calendar months following the effective date of the agreement December 21, 2007 through February 2012. During
the contract periods December 21, 2007 through January 31, 2008 and February 1, 2008 through January 31, 2009
the Company exceeded the $600,000 required minimum.
The Company is also involved in legal proceedings and litigation in the ordinary course of business. In the opinion
of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated
financial position or consolidated results of operations.
NOTE 10 - EARNINGS PER SHARE
Earnings per share are measured at two levels: basic per share and diluted per share. Basic per share is computed by
dividing net income by the weighted average number of common shares outstanding during the period. Diluted 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. Vested restricted shares
F-19
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
NOTE 10 – EARNINGS PER SHARE (continued)
are included in basic common shares outstanding, and unvested restricted shares are included in the diluted common
shares outstanding if the effect is dilutive.
The following information is necessary to calculate earnings per share for the periods presented (in thousands, except
per share amount):
Year Ended June 30,
2010
2009
Net income, as reported………………………………………………
$
9,356
$
4,197
Weighted average common shares outstanding………………………
Effect of dilutive stock options…………………………………………
Weighted average diluted common shares outstanding………………
14,176
776
14,952
12,908
1,088
13,996
Net income per common share
Basic…………………………………………………………………
Diluted………………………………………………………………
$
$
0.66
0.63
$
$
0.33
0.30
Employee stock options excluded from computation of diluted
income per share amounts because their effect would
be anti-dilutive………………………………………………………
241
-
F-20
Exhibit 21.1
Subsidiaries of the Registrant
Name
Jurisdiction of Incorporation
Sharps Compliance of Texas (dba Sharps Compliance, Inc.)
Texas
Sharps e-Tools.com, Inc.
Sharps Safety, Inc.
Sharps Manufacturing, Inc.
Sharps Environmental Services, Inc. (dba Sharps
Environmental Services of Texas, Inc.)
Delaware
Texas
Delaware
Delaware
F-21
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No.
333-155638) of Sharps Compliance Corp. of our report dated August 26, 2010 with respect to the consolidated
financial statements of Sharps Compliance Corp. and subsidiaries as of June 30, 2010 and 2009, and for the years
then ended and to our report dated August 26, 2010 on the effectiveness of Sharps Compliance Corp. and
subsidiaries internal control over financial reporting as of June 30, 2010, included in this Annual Report on Form 10-
K for the year ended June 30, 2010.
/s/ UHY LLP
Houston, Texas
August 26, 2010
F-22
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 302 OF THE
SARBANES-OXLEY ACT
I, Burton J. Kunik, certify that:
1.
I have reviewed this annual report on Form 10-K of Sharps Compliance Corp;
2. Based on my knowledge, this report does not contain any untrue statement of 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 control over financial reporting.
Date: August 26, 2010
/s/ BURTON J. KUNIK
Burton J. Kunik
Chairman of the Board
Chief Executive Officer
F-23
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 annual report on Form 10-K of Sharps Compliance Corp;
2. Based on my knowledge, this report does not contain any untrue statement of 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 control over financial reporting.
Date: August 26, 2010
/s/ DIANA P. DIAZ
Diana P. Diaz
Vice President
Chief Financial Officer
F-24
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 906 OF
THE SARBANES- OXLEY ACT
In conjunction with the annual report of Sharps Compliance Corp. (the “Company”) on Form 10-K for the
year ended June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof, I, Burton
J. Kunik, Chief Executive Officer and Chairman of the Board 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-K report for the year ended June 30, 2010, filed with the Securities and Exchange
Commission on August 26, 2010, fully complies with the requirements of Section 13 (a) or 15(d)
of the Securities and Exchange Act of 1934; and
(2) The information contained in the Form 10-K report for the year ended June 30, 2010 fairly
presents, in all material respects, the financial condition and results of operations of Sharps
Compliance Corp.
Date: August 26, 2010
By: /s/ BURTON J. KUNIK
Burton J. Kunik
Chairman of the Board
Chief Executive Officer
F-25
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER IN ACCORDANCE WITH SECTION 906 OF
THE SARBANES- OXLEY ACT
In conjunction with the annual report of Sharps Compliance Corp. (the “Company”) on Form 10-K for the
year ended June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof, I, Diana
P. Diaz, Senior Vice President and Chief Financial Officer 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
(3) The Form 10-K report for the year ended June 30, 2010, filed with the Securities and Exchange
Commission on August 26, 2010, fully complies with the requirements of Section 13 (a) or 15(d)
of the Securities and Exchange Act of 1934; and
(4) The information contained in the Form 10-K report for the year ended June 30, 2010 fairly
presents, in all material respects, the financial condition and results of operations of Sharps
Compliance Corp.
Date: August 26, 2010
By: /s/ DIANA P. DIAZ
Diana P. Diaz
Vice President
Chief Financial Officer
F-26
CO R P O R AT E A N D M A N A G E M E N T I N F O R M AT I O N
EXECUTIVE OFFICERS
BOARD OF DIRECTORS
David P. Tusa
Chief Executive Offi cer
and President
Claude A. Dance
Senior Vice President,
Sales & Marketing
Diana P. Diaz
Vice President,
Chief Financial Offi cer
Khairan “Al” Aladwani
Vice President,
Quality Control / Assurance
Dr. Burton J. Kunik
Chairman of the Board,
Sharps Compliance Corp.
Houston, Texas
F. Gardner Parker (3) (4)
Lead Independent Director
Parker Investments
Houston, Texas
John W. Dalton (1) (2) (3)
Private Investor
Houston, Texas
Ramsay H. Gillman (1)
Chief Executive Offi cer & President
Gillman Companies
Houston, Texas
Parris H. Holmes (1) (3) (4)
Private Investor
San Antonio, Texas
Philip C. Zerrillo, Ph.D. (2) (3)
Visiting Professor,
Northwestern University
JL Kellogg Graduate School of
Management
(1) Member of the Compensation Committee
(2) Member of Corporate Governance Committee
(3) Member of the Audit Committee
(4) Member of Acquisition Committee
CO M PA N Y F I N A N C I A L I N F O R M AT I O N
TICKER SYMBOL
SMED (NASDAQ)
ANNUAL SHAREHOLDER MEETING
November 18, 2010, at 10:00 am
Hilton Houston Post Oak Hotel,
Richmond Room
2001 Post Oak Blvd.
Houston, Texas 77056
TRANSFER AGENT
For services such as change of address, replacement of lost
certifi cates and changes in registered ownership or for inquiries
to your account, contact:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Phone: 800.368.5948
www.rtco.com
INVESTOR RELATIONS
Investors, stockbrokers, security analysts and others seeking
information about the Company should contact:
Additionally, information
is available on our website at:
www.sharpsinc.com
Materials may be obtained, without charge,
by writing to the Company at:
Sharps Compliance Corp.
Investor Relations
9220 Kirby Drive, Suite 500
Houston, Texas 77054
INDEPENDENT PUBLIC ACCOUNTANTS
UHY L.L.P.
Houston, Texas
David P. Tusa
Chief Executive Offi cer and President
Phone: 713.660.3514
dtusa@sharpsinc.com
Deborah Pawlowski
Kei Advisors LLC
Investor Relations
Phone: 716.843.3908
dpawlowski@keiadvisors.com
Sharps Compliance Corp.
9220 Kirby Drive • Suite 500
Houston, Texas 77054
713-432-0300
www.sharpsinc.com