S H A R P S C O M P L I A N C E C O R P. 2 0 1 1 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 fully integrated provider of cost-eff ective management solutions
for medical waste, used healthcare materials and unused dispensed medications.
Its strategy is to capitalize on its leadership position and continue to penetrate the estimated
$2.8 billion untapped market for used syringes and unused medications generated by targeting the
major agencies that are interrelated with this medical waste and unused medications 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 organization 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 comprehensive solution for the containment, transportation, treatment and tracking of medical waste and
used healthcare materials, such as hypodermic needles, used syringes, lancets and any other medical device or objects
used to puncture or lacerate the skin (referred to as “sharps”). The Company’s TakeAway Environmental Return System™
family of solutions are designed 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.
The Company’s newest off ering, Complete Needle™ Collection & Disposal System, is a comprehensive solution
focused on the under-served home self-injector required to regularly use needles or syringes for their health and well-
being. The Complete Needle™ Collection & Disposal System is actually two off erings in one. First, it provides a reasonably
priced containment solution designed to protect self-injectors and their family members. Second, the product includes
an optional disposal feature utilizing the U.S. Postal Service designed to protect the individual’s community, solid waste
workers and the environment. Off ered at retail pharmacies, our solution off ers signifi cant convenience as well as in-store
counseling opportunities which may lead to better treatment outcomes.
More information on Sharps Compliance and its products can be found on its website at: www.sharpsinc.com.
Home Healthcare
Retail
U.S. Government Contract
Professional
Others
Assisted Living / Hospitality
Core Government
Pharmaceutical
35.2%
23.8%
10.7%
10.3%
8.2%
6.6%
3.6%
1.6%
( I N M I L L I O N S )
( I N M I L L I O N S )
( I N M I L L I O N S )
$40
$40
30
30
20
20
10
10
0
0
$15
$15
12
12
9
9
6
6
3
3
0
0
-3
-3
$ 0.7
$ 0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0.0
0.0
-0.1
-0.1
-0.2
-0.2
$30
$30
25
25
20
20
15
15
10
10
5
5
0
0
07
07
08
08
09
09
10
10
11
11
07
07
08
08
09
09
10
10
11
11
07
07
08
08
09
09
10
10
11
11
07
07
08
08
09
09
10
10
11
11
(in thousands, except employee and per share data)
2011*
2010
2009**
2008
2007
Performance
Revenue
Gross Profi t
Gross Margin
Selling, General and Administrative
Operating Income (Loss)
Operating Margin
Net Income
Diluted Earnings Per Share
$ 19,395
$
39,156
$ 20,297
$ 12,841
$ 11,956
$
6,224
$ 23,654
$ 10,456
$
5,070
$
5,013
32.1 %
60.4 %
51.5 %
$
$
$
$
9,837
$
8,815
(4,536 )
$ 14,398
(23.4 )%
36.8 %
(2,975 )
(0.20)
$
$
9,356
0.63
14,952
$
$
$
$
6,092
3,464
17.1 %
4,197
0.30
13,996
39.5 %
4,783
(1 )
0.0 %
82
0.01
41.9 %
3,946
727
6.1 %
785
0.06
$
$
$
$
13,540
12,338
2,035
5,676
-
2,886
$
$
$
$
2,134
4,691
-
2,169
$
$
$
$
$
$
$
$
Weighted Average Shares Outstanding–Diluted
14,944
Year–End Financial Position
Cash and Cash Equivalents
$ 18,280
$ 18,068
$
4,792
Total Assets
Long-term Debt
Shareholders’ Equity
Other Year–End Data
$ 30,598
$ 31,632
$ 15,188
$
–
$
-
$ 25,865
$ 26,941
$
$
-
9,570
Depreciation and Amortization
1,003
$
Number of Employees
57
796
67
$
418
$
266
$
203
43
33
33
* Operating income includes a special charge of $570,000 in 2011 related to the retirement of the
Company’s former CEO and $400,000 of unusual expenses for a legal settlement and severance costs.
** Operating income includes a special charge of $512,000 in 2009 related to the departure of a former offi cer of the Company.
1
Q: In closing, summarize Sharps’
position and outlook as you
move into a new year.
In spite of economic uncertainty, we
are highly confident in the long-term
strength of our business model and the
huge potential in markets outside the
hospital setting for cost-effective and
comprehensive solutions designed for the
proper management of medical waste
and dispensed patient medications –
needs we are clearly fi lling.
As we focus resources and capture
market share, we will continue to
vigilantly target opportunities that will
provide maximum near-term revenue
and profitability and enable us to
increase our leadership in the markets
we serve. It is our robust organization
and resourcefulness that enable us to
maximize the significant opportunities
available and, ultimately, succeed.
On behalf of our board and employees,
I thank you for your continued confi-
dence in and support of Sharps Compliance.
Q&A With David Tusa
Refl ecting on 2011 and looking ahead
David P. Tusa, President and CEO, was appointed CEO in October of 2010. This interview focuses on his perspective
on the past year’s achievements to increase sales of the Company’s cost-eff ective solutions for the proper
management of medical waste and unused dispensed medications and his vision for the future of Sharps.
Q: What are your thoughts regard-
ing the past year and how has
Sharps progressed in relation to its key
markets?
In fi scal 2011, we refi ned our strategic focus,
aligned resources to enhance our sales
and marketing strategy, and increased
eff orts to capture market opportunities for
our innovative medical waste and unused
medication management solutions. We
continue to make steady progress in
our four core markets and saw an 8.5%
increase in revenue excluding the U.S.
Government contract in fiscal 2011.
Though we reported a net loss of $3.0
million, our bottom line has improved
throughout the year from strong cost
discipline and revenue growth. When
special items1 are excluded, our net loss
was down to $2.3 million. We believe
we will achieve break-even results when
quarterly revenue approaches the $6.0
million mark. At that level, we should see
gross margin of about 40% to 45%.
We have specifi cally targeted the Retail,
Professional, Pharmaceutical Manufacturer
and Government markets because we
understand the specifi c needs and require-
ments of each and believe we have unique
and cost-eff ective solutions to address
them. We continually innovate to discover
unidentifi ed customer needs and partner
with them to help drive their success while
protecting the community and environ-
ment. We also consistently recognize the
importance of the Home Health Care and
Assisted Living/Hospitality markets upon
which Sharps’ core business was built.
We broadened our product offering
to the Retail market with the Sharps
TakeAway Environmental Return System™
for dispensed, non-controlled prescrip-
tion and over-the-counter medications.
It’s been very well received by retail
pharmacies across the country, including
the three largest national chains. Retail
billings in the year grew 7.0% to $4.6 mil-
lion year-over-year.
The Professional market, which grew
22.1% in fiscal 2011, is a significant
opportunity for us, with an estimated
800,000 doctor, dentist, and vet offi ces
as well as clinics, tattoo shops and
others that generate smaller quantities
of medical waste. We believe we have just
scratched the surface of this recurring
revenue opportunity, and results indicate
a growing momentum in penetrating this
market. The market size compared with
the more defi ned target base of retail
pharmacies, pharmaceutical manufactur-
ers and government agencies enables us
to utilize a multi-layered sales approach
combining inside sales, web sales and
multi-media marketing campaigns.
Billings from our inside and online sales
channel grew 156% for the year.
The Pharmaceutical Manufacturer
market was down in fi scal 2011, 59% to
$304,000 with no new programs intro-
duced during the year. However, there
is a surge of interest in our off erings. We
recently secured patient support programs
from two top-20 pharmaceutical manu-
facturers valued at $2 million in total
annual recurring revenue and are involved
with additional opportunities that could
also positively impact FY 2012 revenues.
Finally, Government market revenue,
excluding large U.S. government agency
contracts, for fi scal year 2011 increased
mainly from the sale of TakeAway enve-
lope and Sharps Recovery solutions in
conjunction with the VA pilot. The VA pilot
project is winding down and a decision
on a national roll-out has taken longer
than anticipated. The VA, however, con-
tinues to assess a potential roll-out and
we are positive about the program and
recurring revenue opportunity. In addition
to the potential roll-out of the VA pilot,
we are pursuing additional government-
related opportunities that could positively
impact our fi scal year 2012.
Q: Talk about how you realigned
resources to implement your
strategy in key markets and its
eff ectiveness.
Over the past nine months, we refocused
our sales and marketing approach and
resources to better align with opportunities
in four key markets including a deliberate,
targeted and multi-layered approach
with constant sales promotions to
maximize broader market reach through
the Internet and other electronic media.
We believe growth from these eff orts will
continue to accelerate.
The TakeAway line of solutions has
been very popular with our Retail market.
It is now off ered in about 25,000 of the
approximately 60,000 retail pharmacies
in the country including in about 70% of
This product is actually two off erings in
one. First, the self-injector can purchase a
reasonably priced containment solution
in the same place where they currently
purchase medications and syringes.
Second, the product includes an op-
tional disposal feature that protects the
community, solid waste workers and the
environment. This includes transportation via
a special U.S. Postal Service label, track-
ing and treatment, where the waste is
repurposed by Sharps into PELLA-DRX™,
an industrial material used in energy-
intensive businesses. More details of
the unique off ering can be found at
completeneedle.com.
We believe the solution off ers signifi cant
convenience as it utilizes the same deliv-
ery channel—the retail pharmacy—which
the self-injector, such as a diabetic, uses
to obtain medications and needles. As a
valued benefi t to the retail pharmacy, this
purchase could potentially lead to better
outcomes and an improved relationship
between patients and pharmacists.
As with many retail products, we
believe there could be opportunities for
sponsorship of the new off ering, includ-
ing the optional return feature, by drug
and ancillary product manufacturers,
which could signifi cantly reduce the
cost to the customer.
the national retail chains and in indepen-
dent pharmacies, primarily through the
National Community Pharmacists Associa-
tion. We are pleased that our fi rst major
TakeAway envelope program launched
10 months ago has a reorder rate of about
35% to date which we believe to be very
good for a new off ering that the consumer
had never paid for before.
The average weekly orders for the
Professional market have more than dou-
bled from 67 in the fourth quarter of last
fi scal year to 158 in the fourth quarter of
fi scal year 2011. Due to the extraordinary
response to our new website, launched
in mid-July 2011, we had an almost 70%
growth in weekly web sales since the
launch due to improved functionality
and sophisticated visual presence of our
new site.
Our inside sales team, aimed at the
Professional Market, grew to 13 personnel
and we expect to add around 2 people
per quarter. We are encouraged that this is
leading to larger dollar opportunities that
we might not have otherwise discovered
with the traditional direct sales force.
Q: Sharps has been an innovator
for many years and recently
announced the Complete Needle™
Collection & Disposal System. How
does this new solution work and
what’s your expectation?
With over nine months in development,
we believe the new patent-pending
Complete Needle™ Collection & Disposal
System is a potential break-through in
providing the approximate 10 million
people in the country who legally self-
inject medications a safe and convenient
means for proper containment and disposal
of needles and syringes. In addition to
protecting patients, their families and
communities, the product aims to reduce
the number of improperly disposed
needles ending up in solid waste streams
and landfi lls.
2
for a legal settlement and severance costs in the fourth quarter of fi scal 2011.
1 Special items include a special charge related to the retirement of the Company’s former CEO in the fi rst quarter of fi scal 2011 and unusual expenses
3
Focus on Market Drivers
Capitalizing on opportunities across our four primary growth markets
The Retail Market continues to
contribute to our recurring revenue
growth through our support for
retail fl u shot programs and through
the introduction of two signifi cant
new off erings. Our historical strength
in this market is due to the cost-
eff ective and convenient medical waste management
solutions that we provide for in-store fl u shot and year-round
injection programs.
Our fi scal 2011 Retail Market results benefi ted greatly from
sales of our Takeaway Environmental Return System™. This
solution addresses the proper disposal of dispensed unused
medication. It’s been well received by the major drugstore
chains as well as independent retail pharmacies across the
country. The TakeAway line is now off ered in almost half of
the 60,000 retail pharmacies in the U.S.
New to this market in 2011 was the introduction of our
patent-pending Complete Needle™ Collection & Disposal
System. This breakthrough off ering provides a safe, convenient
way for the 10 million people in the U.S. who self-inject medi-
cations to safely contain and dispose of their needles and
syringes. In addition to protecting the patient, their family
and community, this solution is designed to help protect the
environment by reducing improper disposal.
The Professional Market consists
of approximately 800,000 doctors,
dentists, veterinarians and other
businesses that are required to
properly dispose of the medical
waste generated in their practices.
We are capitalizing on this signifi cant
revenue opportunity with the growth of our inside sales group
and the recent launch of our new eCommerce web site, both
of which focus on educating the professional market about
the advantages of the Sharps Recovery System™ and the
cost-eff ective alternative to the traditional pick-up service.
Our inside sales team, now numbering 13 personnel,
continues to grow in size and sales results. Our redesigned
eCommerce site launched in mid-July of 2011 and has already
increased website sales to the professional market by 70% a
week over those generated by our previous site.
WE CONTINUALLY INNOVATE TO DISCOVER
UNIDENTIFIED CUSTOMER NEEDS AND PARTNER
WITH THEM TO HELP DRIVE THEIR SUCCESS
4
The Government Market billings for
2011 increased primarily as a result of
sales of the TakeAway System™ en-
velope and Sharps Recovery System™
solutions sold in conjunction with
the Veterans Administration pilot
program. We believe the outlook re-
The Pharmaceutical Manufacturer
Market is showing new interest in
our patient support programs for the
proper containment, return and treat-
ment of needles or injection devices.
Recently, we were awarded patient
support programs from two top-20
pharmaceutical manufacturers. Those programs will represent
mains positive regarding the potential roll-out of that program
a combined value of over $2 million in annual recurring revenue.
to the VA’s 5.5 million patients and the corresponding recur-
The programs are scheduled to launch in mid-FY 2012 and roll
ring revenue opportunity. In addition to the potential roll-out
out over the next six to nine months. They involve direct fulfi ll-
of the VA pilot, we are pursuing additional government-related
ment of the Sharps Recovery System™ to the pharmaceutical
opportunities that could positively impact our fi scal year 2012.
manufacturers’ program participants.
Our proprietary SharpsTracer™ system tracks the return of
the Sharps Recovery System™ by the patient to the treatment
facility and then makes the data available to the pharmaceutical
manufacturer. That information assists them in monitoring
medication discipline and provides a touch point for individual
patient follow-up.
5
Introducing a Complete Approach
for consumers with medications requiring self-injection
Sharps Complete Needle™
Collection & Disposal System
From containment to proper disposal, the Complete Needle™
Collection & Disposal System provides individuals with a convenient
and cost-eff ective means to properly contain, return and dispose
of used needles.
Complete Needle™ off ers two solutions in one.
1. Containment packaging — designed to protect self-injectors and
their family members from the risk of an accidental needle-stick.
2. A convenient disposal option — shipping via U.S. Postal Service to the
Sharps Compliance treatment facility where the system is processed,
treated and repurposed into PELLA-DRX™, an industrial material used
in energy-intensive businesses.
Sharps Complete Needle™ Collection & Disposal System, is available
exclusively through the nation’s leading drugstore chains with more
retail locations expected after December 1, 2011.
For more information visit www.completeneedle.com or call the
dedicated Complete Needle line at 1-888-988-8859.
6
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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, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-34269
SHARPS COMPLIANCE CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
74-2657168
(I.R.S. Employer Identification No.)
9220 Kirby Drive, Suite 500, Houston, Texas
(Address of principal executive offices)
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
Common Shares, $0.01 Par Value
Name of Each Exchange on Which Registered
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 (cid:0)(cid:0) (cid:289) No (cid:0)(cid:0)
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 (cid:0)(cid:0) (cid:289) No (cid:0)(cid:0)
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 (cid:0)(cid:0) (cid:289) No (cid:0)(cid:0)
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
files). Yes (cid:0)(cid:0) (cid:289)(cid:335)(cid:368)(cid:289)(cid:0)(cid:0)
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. (cid:0)(cid:0)
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 (cid:0)
Accelerated filer X
Non-accelerated filer (cid:0) Smaller reporting company (cid:0)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:0)(cid:0) (cid:289)
No (cid:0)(cid:0)
As of December 31, 2010, the aggregate market value of the Registrant’s Common Stock held by non-affiliates was
approximately $52.8 million (based on the closing price of $4.43 on December 31, 2010 as reported by The NASDAQ
Capital Market).
The number of common shares outstanding of the Registrant was 15,067,427 as of August 30, 2011.
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 17, 2011 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 ........................................................................................................... 12
Item 1B Unresolved Staff Comments .................................................................................. 15
Item 2 Description of Property .......................................................................................... 15
Item 3 Legal Proceedings .................................................................................................. 15
Item 4 Removed and Reserved
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities .......................................................... 16
Item 6 Selected Financial Data .......................................................................................... 18
Item 7 Management’s Discussion and Analysis of Financial Condition and
Results of Operations ......................................................................................... 19
Item 7A Quantitative and Qualitative Disclosures About Market Risk ............................... 29
Item 8 Financial Statements .............................................................................................. 29
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................................................................... 29
Item 9A Controls and Procedures ........................................................................................ 30
Item 9B Other Information ................................................................................................... 31
PART III
Item 10 Directors, Executive Officers and Corporate Governance ...................................... 31
Item 11 Executive Compensation ....................................................................................... 31
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters .............................................................................. 32
Item 13 Certain Relationships and Related Transactions and Director
Independence ..................................................................................................... 32
Item 14 Principal Accountant Fees and Services ................................................................ 32
PART IV
Item 15 Exhibits and Financial Statement Schedules .......................................................... 32
Signatures .............................................................................................................. 36
____________
* 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
Sharps Compliance Corp. is a leading full-service provider of cost-effective management solutions for medical waste, used
healthcare materials and unused dispensed medications. Our solutions facilitate the proper treatment of numerous types of
medical waste, used healthcare materials 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”). 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. We believe the fully-integrated nature of our operations is a key
factor leading to our success and continued recurring revenue growth.
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. 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. There are an estimated 800,000 doctors, dentists, veterinarians, clinics, tattoo parlors and other businesses in the
country that generate smaller quantities of medical waste, including used syringes. These offices and facilities, which must
demonstrate proper management of their medical waste, comprise a market opportunity of approximately $600 million,
based on estimates of using our solution offerings rather than the traditional pick-up service in what we characterize as a
regulated market. 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, over $600 thousand
per year for medical waste disposal in the regulated market 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 the immediate flu shot needs and in the long-term as the public
increasingly obtains its immunizations from retail locations and clinics. Third, there is growing demand for Sharps
TakeAway Environmental Recovery System™ solutions for unused, non-controlled prescriptions and over-the-counter
medications. 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®).
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
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. We 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, we were awarded the first
option year (ending January 31, 2011) valued at approximately $1.6 million and was recognized from February 1, 2010
through January 31, 2011. In January 2011, we were awarded the second option year (ending January 31, 2012) valued at
approximately $3.0 million and is to be recognized from February 1, 2011 through January 31, 2012. There is expected to be
approximately $3.0 million in revenue in calendar year 2011 for the maintenance component of the contract including $1.5
million in the second half of calendar year 2011. The remaining two option years are expected to be approximately $3.0
million per contract year. Although, we believe the amounts above to be reasonable based upon the underlying contract and
its current project plan, we 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.
In August 2011, the Company introduced the Complete Needle™ Collection and Disposal System which is focused on the
traditional under-served home self-injector required to regularly use needles or syringes for their health and well-being, such
as people with diabetes. The Complete Needle™ Collection and Disposal System is actually two offerings in one. First, the
product provides the individual self-injector with a reasonably priced containment solution designed to protect self-injectors
and their family members. Second, the product includes an optional disposal feature utilizing the USPS designed to protect
the individual’s community, solid waste workers and the environment. The solution offers significant convenience as it
utilizes the same delivery channel, the retail pharmacy, that the self-injector typically uses to obtain medications, for
example, insulin, and needles or syringes. The solution is also designed to enhance the interaction between the pharmacist
and the individual thereby creating counseling opportunities and possibly better treatment outcomes.
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 57 employees (all full time). We have manufacturing, assembly, distribution
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and warehousing operations located on Reed Road in Houston, Texas, and our corporate offices located on Kirby Drive in
Houston, Texas. We maintain an additional warehouse facility with manufacturing, assembly and distribution capabilities in
College Park, Georgia. We own and operate a fully-permitted treatment facility in Carthage, Texas that incorporates 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. Just
over two years ago we supplemented the treatment facility’s existing incineration process with an autoclave system, which is
a cost-effective alternative to traditional incineration that treats medical waste with steam at high temperature and pressure to
kill pathogens. The autoclave system is utilized alongside the incinerator for day-to-day operations. We believe that our
facility is one of only ten permitted commercial facilities in the United States capable of treating all types of medical waste,
used healthcare materials and unused or expired dispensed medications (i.e., both incineration and autoclave capabilities).
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-It IVTM Poles, Trip LesSystem®,
Sharps® Pump and Asset Return Box, Sharps Secure® Needle Collection and Containment System, Sharps Recovery System®
Needle Collection and Mailback Disposal System, IsoWash® Linen Recovery System and Biohazard Spill Clean-Up Kit and
Disposal System.
SOLUTIONS OVERVIEW
MARKET 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 and used healthcare materials 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 SharpsTracer® system.
TakeAway Environmental Return 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.
Complete Needle™ Collection and Disposal System: a comprehensive solution focused on the traditional under-served
home self-injector required to regularly use needles or syringes for their health and well-being, such as people with diabetes.
The Complete Needle™ Collection and Disposal System is actually two offerings in one. First, the product provides the
individual self-injector with a reasonably priced containment solution designed to protect self-injectors and their family
members. Second, the product includes an optional disposal feature utilizing the USPS designed to protect the individual’s
community, solid waste workers and the environment. Our solution offers significant convenience as it utilizes the same
delivery channel, the retail pharmacy, that the self-injector typically uses to obtain medications, for example insulin, and
needles or syringes. Our solution is also designed to enhance the interactions between the pharmacist and the individual
thereby creating counseling opportunities and possibly better treatment outcomes.
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.
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. 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.
There are an estimated 800,000 doctors, dentists, veterinarians, clinics, tattoo parlors and other businesses in the country that
generate smaller quantities of medical waste, including used syringes. These offices and facilities, which must demonstrate
proper management of their medical waste, comprise a market opportunity of approximately $600 million, based on
estimates of using our solution offerings rather than the traditional pick-up service in what we characterize as a regulated
market.
Industry experts estimate that approximately 40% of the dispensed medication from four billion dispensed medication
prescriptions goes unused every year in the United States generating an estimated 200 million pounds of unused medication
waste 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 per
year.
We continue to take advantage of the many opportunities in our markets served as communities, consumers, injectors,
healthcare facilities, professional offices, pharmaceutical manufacturers and government agencies become more aware of the
issues surrounding the proper disposal of medical waste, used healthcare materials and unused dispensed medications. The
following events contribute to increasing awareness:
(cid:120)
(cid:120)
(cid:120)
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 another nine states plus the District of Columbia are considering or have introduced similar
legislation, while the remaining states operate under the EPA guidance noted above. In April 2011, the
United States Senate re-introduced a bill (S.725) which, if enacted, would provide for Medicare
reimbursement, under part D, for the safe and effective disposal of used needles and syringes; and
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(cid:120)
(cid:120)
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. California’s Senate Bill 419,
which has passed the Senate and is moving through the Assembly, sets additional standards for making the
SB 486 plans more accessible to the public.
In 2009 and 2010, the states of Iowa and North Dakota introduced state funded programs to properly
dispose of unused medications. In 2010, Minnesota enacted legislation that allows individuals to transfer
their unused dispensed medications directly or through a caregiver to an organization authorized by the
state to manage and/or ultimately destroy the medication.
(cid:120)
In October 2010, the Secure and Responsible Drug Disposal Act was enacted which addresses the proper
handling of unused controlled 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 designed to address the proper management of medical waste, used healthcare materials
and patient dispensed unused or expired medications. The Company is able to offer mail or ship-back based services at a
significantly lower cost as compared to the traditional model of pick-up services since the Company utilizes the existing
infrastructure of USPS or United Parcel Service (“UPS”) for return transportation. In contrast to traditional pick-up service
providers which generally make periodic pick-ups, our mail or ship-back based solution offerings are less costly and more
convenient. 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 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 solution offerings, 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 waste and dispensed patient medications on the environment. Most used syringes and needles as well as unused or
expired 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 various industrial resources. The use of recycled paper and plastic materials
for many of 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 works to raise public awareness of the issue.
Vertically integrated full-service operations.
Our operations are fully integrated including manufacturing, assembly, distribution, treatment, online tracking and customer
reporting. We have manufacturing, assembly, distribution and warehousing operations in Houston, Texas, and an additional
warehouse facility with manufacturing, assembly and distribution capabilities in College Park, Georgia. We own and operate
a fully-permitted treatment facility in Carthage, Texas, that incorporates our processing and treatment operations. Just over
two years ago we supplemented the treatment facility’s existing incineration process with an autoclave system, which is a
cost-effective alternative to traditional incineration that treats medical waste with steam at high temperature and pressure to
kill pathogens. The autoclave system is utilized alongside the incinerator for day-to-day operations. We believe that our
facility is one of only ten permitted commercial facilities in the United States capable of treating all types of medical waste,
used healthcare materials and unused or expired dispensed medications (i.e., both incineration and autoclave capabilities).
We track the movement of each shipment from outbound shipping to ultimate treatment and provide confirmation to the
customer for their records using our proprietary SharpsTracer® tracking and documentation system. We also provide
customized reporting for many of our customers. 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 for our
customers. We believe the fully-integrated nature of our operations is seen by current and prospective customers as a key
factor and differentiator leading to our success and leadership position in our 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.
Increased state and federal regulatory attention.
To protect citizens and waste workers from needle stick injuries, nine states have passed legislation or regulations making it
illegal to discard used sharps into household trash. Another nine states and the District of Columbia have legislation pending
or strict guidelines regarding home sharps disposal. Passed or pending legislation related to home sharps disposal covers
43% of the U.S. population. Countless cities in states without restrictions have begun to pass ordinances preventing disposal
of sharps in the trash.
In order to reduce poisonings and pollution of our water, twenty-two states and the District of Columbia have introduced
legislation over the last few years intended to manage the disposal of consumer unused medications. Seven states and the
District of Columbia have successfully passed such legislation. Passed or pending legislation related to disposal of consumer
medications covers 65% of the U.S. population. 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 we are well
positioned to benefit given our strict adherence to established standards and extensive documentation and records.
Diverse product markets.
Sharps offers services and products to a wide variety of end markets. The Company’s growth strategies are focused on retail
pharmacies and clinics, pharmaceutical manufacturers, professional physician, dental and veterinary clinics and the U.S.
Government contract, federal, state and local government agencies. We also serve home health care companies, retirement
and assisted living facilities and hospitality and other which includes hotel, commercial, industrial and agriculture.
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Our billings by market for the years ended June 30, 2011, 2010 and 2009 are below (as expressed in percentages of
revenues):
Year Ended June 30,
2010
2009
2011
BILLINGS BY MARKET:
Home Health Care
Retail
U.S. Government contract
Professional
Other
Assisted Living/ Hospitality
Core Government
Pharmaceutical
35%
24%
11%
10%
8%
6%
4%
2%
100%
17%
11%
59%
4%
2%
3%
2%
2%
100%
36%
9%
29%
5%
7%
5%
1%
8%
100%
Highly scalable business model.
Because of our proven business model, we can add new business while leveraging our existing fixed cost structure. Our
facilities are able to accommodate significant additional volume, incurring only variable costs of transportation, storage and
processing. Once we gain a new customer, our profitability typically increases as our customer base grows without
additional overhead expense due to the embedded nature of our products and the ease with which we can accommodate
additional volume.
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. Mr. David P. Tusa, CEO and President, in addition to his eight 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. Mr. Gregory C. Davis, Vice President of Operations, has over 18 years of information
technology experience. Mr. Khairan Aladwani, Vice President of Assurance/Quality Control, have over 25 years of quality
assurance experience at a variety of firms.
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 and markets.
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, the Complete Needle™ Collection and Disposal
System or other specialized products. Although currently focused primarily on the proper management of used syringes and
needles as well as dispensed expired or unused medication, 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.
Although, our Pharmaceutical market did not experience growth during the year ended June 30, 2011, we have seen a recent
surge of interest in our patient support program solution offering among pharmaceutical manufacturers as it relates to self-
injectable medications. We believe manufacturers are now, more than ever, focused on (i) product differentiation, (ii)
improved interaction with patients and (iii) creating a touch point for individual patient follow-up that could lead to
improved therapy outcomes.
As proof of this, we were recently awarded patient support programs from two top-20 pharmaceutical manufacturers with a
combined value of over $2 million in annual recurring revenue when fully launched. The programs are scheduled to launch
in the December quarter and should roll out over the following six- to nine- month period. Both patient support programs
include the direct fulfillment of the Sharps Recovery System® to the pharmaceutical manufacturers’ program participants
which provides the proper containment, return and treatment of the needles or injection devices utilized in therapy. Sharps’
proprietary SharpsTracer™ system tracks the return of the Sharps Recovery System® by the patient to the treatment facility,
and then makes available to the pharmaceutical manufacturer electronic data which assists them in monitoring medication
discipline and provides them with a touch point for individual patient follow-up which potentially could lead to better
outcomes. 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 allowed 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 expanded to include eight VISNs. As of June 30, 2011, the pilot is winding down as
the VA evaluates a broad roll-out program that would make our solutions available across all VISNs. We also 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 MWMSTM 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, we expect additional
growth through commercial emergency preparedness programs as well.
Enhance sales and marketing efforts.
Through the expansion of our sales force (both inside and field), launch of a new website and corresponding promotional
activity in mid-July 2011, development of additional marketing materials including use of the Internet 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 received significant press coverage
of our TakeAway Environmental Return Systems product line and expect the same with our Complete Needle™ Collection
and Disposal System. Subsequent demand along with sales and marketing efforts are helping our solution offerings become a
more standard item in the retail setting.
Improve product and service awareness to attract new customers.
As we grow, we continue to focus additional marketing and sales efforts designed to educate home health care providers,
physician and dental clinics, pharmaceutical manufacturers, consumers, communities and government agencies of the
benefits of our solution offerings and the need for safe, cost-effective and environmentally-friendly methods of medical waste
treatment. We believe that the full-service nature of our solution offerings, ease of our mail and ship-back based delivery
system and convenience 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 and used healthcare materials 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 understanding of 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.
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Develop new products and services.
COMPETITION
We continue to develop new solution offerings including the Complete Needle™ Collection and Disposal System (designed
for the traditional under-served home self-injector), the Sharps Medical Waste Management System™, the TakeAway line of
products for unused medications (including TakeAway Environmental Return System™), the Medical/Professional
TakeAway Recovery System™ and the RX TakeAway 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
innovative 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 solution offerings designed
to facilitate the proper and cost effective solutions for management of medical waste, used healthcare materials and unused
dispensed medications to better serve our customers and the environment. Additionally, we will continue to seek out and
identify prospective new customers and markets for new solutions designed to meet the needs of these new customer
segments. Research and development expenses were $131 thousand, $41 thousand and $20 thousand for the fiscal years
ended June 30, 2011, 2010 and 2009, respectively.
CONCENTRATION OF CREDIT AND SUPPLIERS
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, 2011, two customers represented approximately 33% of revenues. Those same
two customers represented approximately 22% or $660 thousand, of the total accounts receivable balance at June 30, 2011.
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. We may be adversely
affected by our 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
solution offerings and (iii) the continued diversification of our solution offerings into additional markets outside of its
traditional customer base.
Currently, the majority of our 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 treatment facility. We also have
an arrangement with UPS whereby UPS transports the Company’s TakeAway Recovery System products from the end user
to the Company’s treatment facility. 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.
We maintain 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, we own all proprietary molds and dies and utilize three contract manufacturers for the production of the
primary raw materials. We believe that alternative suitable contract manufacturers are readily available to meet the
production specifications of our products and solutions. With respect to our Pitch-It™ IV Poles, the Company maintains an
exclusive manufacturing relationship with Drive Medical Design & Manufacturing. We utilize national suppliers such as
Southern Container, R & D Molders, Uline and W. W. Grainger, Inc. for the majority of the raw materials used in our other
products and solutions.
INTELLECTUAL PROPERTY
We have a portfolio of trademarks and patents, both granted and pending. We consider our trademarks important in the
marketing of our products and services, including Sharps Disposal by Mail System®, TakeAway Environmental Return
System™, Complete Needle™ Collection and Disposal System, Sharps®MWMS™, Pitch-It IV™ Poles, Trip LesSystem®,
GREEN Waste Conversion Process™ and PELLA-DRX™ among others. With respect to our registered marks, we continue
using such marks and will file all necessary documentation to maintain their registrations for the foreseeable future. We
maintain patents on Pitch-It™ IV Poles which are scheduled to expire in 2012. We have a number of patents pending,
including those applicable to our Complete Needle™ Collection and Disposal System, Sharps Recovery System™ Needle
Collection and Mailback Disposal System, the Sharps® Medical Waste Management System™, the GREEN Waste
Conversion Process™, and Sharps Secure® Needle Collection and Containment System™ and are in the process of applying
for other trademarks and patents.
There are several competitors who offer similar or identical products and services that facilitate the disposal of smaller
quantities of medical waste. 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, we 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. We believe our comprehensive line of
proven solution offerings, first mover advantages, excellent industry reputation, significant history of market and customer
success, quality solutions and products, as well as our 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. We are 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 facilities. 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 transported medical waste. 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 our 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 us
to obtain a Title V permit and conduct additional monitoring. We are required to comply with these new standards by the end
of 2012. Such changes will require us to incur capital expenditures in order to meet the requirements of the regulations. We
have 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. We believe autoclaving is
environmentally cleaner and a less costly method of treating medical waste than incineration. Due to our continued growth,
we anticipate that we 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. We expect capital expenditures related to these new
regulations to be made by the end of the first half of fiscal year 2013.
10
11
ITEM 1A. RISK FACTORS
We may be unable to manage our growth effectively.
We experienced significant growth with revenues increasing more than 93% to $39.2 million for the fiscal year ended
June 30, 2010 from $20.3 million for fiscal year ended June 30, 2009. As the U.S. Government contract moved into its
maintenance phase during fiscal year 2011, revenues decreased 51% to $19.4 million. The decrease was due to decreased
billings for the U.S. Government contract of $21.1 million partially offset by increased recurring revenue growth of $1.4
million or 8%. The increase in core revenue as well as an expanded presence in the retail markets, 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, at some point, 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, 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 CEO and President, Senior Vice President of Sales, Vice President and CFO,
Vice President of Operations and Vice President of Quality Assurance. We believe 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 arrangements 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, 2011, two customers
represented approximately 33% of revenues. Those same two customers represented approximately 22%, or $660 thousand,
of the total accounts receivable balance at June 30, 2011. 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.
customer success, quality solutions and products, as well as our capabilities as a vertically integrated producer of products
and services, provides significant differentiation in the current competitive market.
The lack of customer long-term volume commitments could adversely affect the Company’s profits and future growth.
Although we enter into exclusive contracts with the majority of our 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 our financial performance.
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 were generated through the contract with a major U.S. government agency for the period
from March 2009 through December 2009. 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, we were awarded the first option year (ending January 31,
2011) valued at approximately $1.6 million and was recognized from February 1, 2010 through January 31, 2011. In
January 2011, we were awarded the second option year (ending January 31, 2012) valued at approximately $3.0 and is to be
recognized from February 1, 2011 through January 31, 2012. There is expected to be approximately $3.0 million in revenue
in calendar year 2011 for the maintenance component of the contract including $1.5 million second half of calendar year
2011. The remaining two 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 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.
Aggressive pricing by existing competitors and the entrance of new competitors could drive down the Company’s profits
and slow its growth.
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.
There are several competitors who offer similar or identical products and services that facilitate the disposal of smaller
quantities of medical waste. 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, we do
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. We believe our comprehensive
line of proven solution offerings, first mover advantages, excellent industry reputation, significant history of market and
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. We believe that
we are currently in compliance in all material respects with all applicable laws and regulations governing our business,
including the permits and authorizations for our 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 us to be in compliance with such
changing laws, rules and regulations. Furthermore, any material relaxation of any existing regulatory requirements governing
12
13
the government. Any change in regulation restricting the shipping of medical waste, used healthcare materials or unused or
expired dispensed pharmaceuticals through these channels would be detrimental to our 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.
The Company’s stock has experienced, and may continue to experience, low trading volume and price volatility.
Our common stock has been listed on the NASDAQ Capital Market (“NASDAQ”) under the symbol “SMED” since May 6,
2009. The daily trading volumes for our common stock are, and may continue to be, relatively small compared to many other
publicly traded securities. Since trading on the NASDAQ, our 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 our common stock may, therefore, be volatile.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of the date of this report, we do 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 on Reed Road in Houston, Texas, and corporate offices on Kirby Drive in
Houston, Texas. We maintain a warehouse facility with manufacturing, assembly and distribution capabilities in College
Park, Georgia. These leases expire from April 2014 to April 2015 with options to renew these leases for warehouses for 5
years and for office space 10 years.
We own and operate 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
None.
the transportation and disposal of medical waste could result in a reduced demand for our products and services and could
have a material adverse effect on our 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.
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 us to obtain a Title V permit and conduct additional monitoring. We are required to comply with these
standards by the end of 2012. Such changes will require us to incur capital expenditures in order to meet the requirements of
the regulations. We have 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. We believe
autoclaving is environmentally cleaner and a less costly method of treating medical waste than incineration. Due to our
continued growth, we anticipate that we 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. We expect 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.
Sharps’ business utilizes a facility for the proper disposal or treatment of medical waste, used healthcare materials and
unused pharmaceuticals. Our owned facility has both incineration and autoclave technologies in Carthage, Texas (Panola
County). Prior to the purchase of the facility in January 2008, we had operated the facility since 1999 under a lease
arrangement. Sharps’ 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 we have 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 our 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.
We currently transport (from the patient or user to the Company’s facility) the majority of our solution offerings using USPS;
therefore, any long-term interruption in USPS delivery services would disrupt the disposal or treatment element of our
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, we entered into an arrangement with UPS whereby UPS transports our TakeAway
Recovery System™ line of solution offerings. The ability to ship items, whether through the USPS or UPS, is regulated by
14
15
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”. Since trading on the NASDAQ (May 6, 2009), the Company’s common stock had an average
trading volume of approximately 2,170,000 shares traded per month. The table below sets forth the high and low closing
prices of the Company’s common stock on the NASDAQ (July 1, 2009 through August 30, 2011) for each quarter within the
last two fiscal years.
Fiscal Year Ended June 30, 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended June 30, 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ending June 30, 2012
First Quarter (August 30, 2011)
Common Stock
High
Low
$
$
$
$
10.18
11.91
10.27
7.68
$
$
$
$
5.40
5.87
5.75
5.35
$
$
$
$
6.21
7.97
5.85
3.98
$
$
$
$
4.00
3.98
3.74
3.58
$
4.09
$
2.98
Stockholders: At August 30, 2011, there were 15,067,345 shares of common stock held by approximately 167 holders of
record. The last reported sale of the common stock on August 30, 2011 was $4.09 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.
Corporate Performance Graph*: The graph compares the cumulative total return (i.e., stock price appreciation) on The
Company’s common stock from the first day it began trading on the NASDAQ and each quarter thereafter with the
cumulative total return for the same period on the NASDAQ Small Cap Index and the Dow Jones US Waste and Disposal
Services Index. The graph assumes that $100 was invested on May 6, 2009 in our common stock and in the stock represented
by each of the two indices.
250.00
200.00
150.00
100.00
50.00
0.00
5/6/09
6/30/09
9/30/09
12/31/09
3/31/10
6/30/10
9/30/10
12/31/10
3/31/11
6/30/11
Sharps Compliance Corp.
NASDAQ Small Cap Index
Dow Jones US Waste and Disposal Services Index
*The Corporate Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor
shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the
extent that we specifically incorporate it by reference into such filing.
Securities Authorized for Issuance under Equity Compensation Plans:
The following equity compensation plan information is provided as of June 30, 2011:
Plan Category
2010 Stock Plan as approved by
shareholders (1) (3)
1993 Stock Plan as approved by
shareholders (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
(b)
176,500
$
4.51
711,626
$
4.40
Total
888,126
$
4.43
Notes:
(1) Represents stock options issued under the 2010 Sharps Compliance Corp. Stock Plan.
(2) Represents stock options issued under the 1993 Sharps Compliance Corp. Stock Plan.
(3) The 2010 Stock Plan replaced the 1993 Stock Plan in November 2010.
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
(c)
754,000
122,673
876,673
16
17
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
The following selected historical financial data has been derived from our audited financial statements and should be read in
conjunction with the historical Consolidated Financial Statements and related notes (in thousands except earnings per share
data):
2011
For the Year Ended June 30,
2010
2008
2009
2007
Revenues ………………………….
19,395
Operating Income (Loss) …………… (4,536)
(2,975)
Net Income (Loss)………………….
$
$
$
$
$
$
39,156
14,398
9,356
$
$
$
20,297
3,464
4,197
$
$
$
12,841
(1)
82
$
$
$
11,956
727
785
Net Income (Loss) per share:
Basic ………………………………
Diluted ……………………………
$
$
(0.20)
(0.20)
$
$
0.66
0.63
$
$
0.33
0.30
$
$
0.01
0.01
$
$
0.07
0.06
$
30,598
Total Assets ……………………….
Total Debt ………………………….
$
-
Cash and Cash Equivalents ………… 18,280
$
$
20,226
Working Captial …………………..
$
25,865
Total Shareholder's Equity ……….
$
31,632
$
-
$
18,068
$
21,617
$
26,941
15,188
$
$
-
$
4,792
$
4,566
$
9,570
5,676
$
$
-
$
2,035
$
1,896
$
2,886
4,691
$
$
2
$
2,134
$
1,968
$
2,169
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.”
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, 2011, 2010 and 2009, respectively. The following table sets forth, for the periods indicated,
certain items from the Company’s Consolidated Statements of Operations (dollars in thousands except for percentages
expressed as a percentage of revenues):
2011
%
Year Ended June 30,
%
2010
Revenue
Cost of revenues
Gross profit
SG&A expense
Special charge
Depreciation and amortization
$
19,395
13,171
6,224
9,837
570
353
100.0%
67.9%
32.1%
50.7%
2.9%
1.8%
$
39,156
15,502
23,654
8,815
-
441
100.0%
39.6%
60.4%
22.5%
1.1%
2009
%
$
20,297
9,841
10,456
6,604
-
388
100.0%
48.5%
51.5%
32.5%
1.9%
Operating income (loss)
(4,536)
(23.4%)
14,398
36.8%
3,464
17.1%
Other income
45
0.2%
37
0.1%
33
0.2%
Net income (loss) before income taxes
(4,491)
14,435
3,497
Income tax expense (benefit)
Net income (loss)
(1,516)
(2,975)
$
(7.8%)
(15.3%)
5,079
9,356
$
13.0%
23.9%
(700)
4,197
$
(3.4%)
20.7%
YEAR ENDED JUNE 30, 2011 AS COMPARED TO YEAR ENDED JUNE 30, 2010
Total revenues for the fiscal year ended June 30, 2011 of $19.4 million decreased by $19.8 million, or 50.5%, over the total
revenues for the fiscal year ended June 30, 2010 of $39.2 million. Billings by market are as follows (in thousands):
2011
(Unaudited)
Year Ended June 30,
2010
(Unaudited)
Variance
(Unaudited)
BILLINGS BY MARKET:
Home Health Care
Retail
U.S. Government Contract
Core Government
Professional
Assisted Living/ Hospitality
Pharmaceutical
Other
Subtotal
GAAP Adjustment *
Revenue Reported
$
$
$
6,859
4,641
2,089
699
2,007
1,287
304
1,619
19,505
(110)
19,395
6,543
4,338
23,200
642
1,644
1,015
742
1,284
39,408
(252)
39,156
316
303
(21,111)
57
363
272
(438)
335
(19,903)
142
(19,761)
$
$
$
18
19
During the first quarter of fiscal year 2011, the Company recorded a special charge of $0.6 million on a pre-tax basis, or
$0.02 per diluted loss per share, which represents expenses incurred with the retirement of the Company’s former Chief
Executive Officer, Dr. Burton Kunik. The special charge consists of (i) severance-related items totaling $0.5 million, (ii)
non-cash stock-based compensation expense of $0.1 million (resulting from accelerated vesting of stock option awards), and
(iii) legal fees related to the separation agreement of less than $0.1 million. The Company paid Dr. Kunik $0.1 million in
September 2010 and $0.4 million in April 2011 related to the expenses noted above.
The Company generated an operating loss of $4.5 million for the year ended June 30, 2011 compared to an operating income
of $14.4 million for the year ended June 30, 2010. The operating margin was (23.4%) for the year ended June 30, 2011
compared to 36.8% for the year ended June 30, 2010. The decrease in operating income and operating margin is a result of
the above mentioned decrease in revenue and operating leverage inherent in the Company’s business model.
The Company generated a loss before tax of $4.5 million for the year ended June 30, 2011 versus income before tax of $14.4
million for the year ended June 30, 2010. The decrease in income before tax is a result of lower operating income (discussed
above).
The Company’s effective tax rate for the year ended June 30, 2011 was 33.8% compared to 35.2% for the year ended June
30, 2010. The Company uses estimates in providing for income taxes on a year to date basis and those estimates may change
in subsequent interim periods.
The Company generated net loss of $3.0 million for the year ended June 30, 2011 compared to net income of $9.4 million
for the year ended June 30, 2010. The decrease in net income is a result of lower operating income (discussed above).
The Company reported diluted loss per share of $0.20 for the year ended June 30, 2011 versus diluted earnings per share of
$0.63 for the year ended June 30, 2010. The decrease in diluted earnings per share is a result of a lower net income
(discussed above).
*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
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 decrease in revenues is primarily attributable to decreased billings in the U.S. Government Contract ($21.1 million) and
Pharmaceutical ($0.4 million) markets. These decreases in billings were partially offset by increased billings in the
Professional ($0.4 million), Home Health Care ($0.3 million), Retail ($0.3 million), Other ($0.3 million) and Assisted
Living/Hospitality ($0.3 million) markets. U.S. Government Contract billings are associated with the Company’s contract
with a major U.S. government agency announced in February 2009. The current year billings were for maintenance and the
prior year billings include (i) $22.4 million recognized in the first half of fiscal year 2010 for the sale of the Company’s
Sharps MWMS to this major U.S. government agency and (ii) $0.8 million recognized in the second half of fiscal year 2010
attributable to the transition from the product build out to the maintenance phase of the Company’s contract with the U.S.
government agency. This resulted in a decrease in billings under this contract of $21.1 million. The decrease in the
Pharmaceutical market billings is due to the timing of customer orders and the discontinuation of one the Company’s patient
support programs. The increase in Professional market billings was a direct result of the Company’s targeted telemarketing
activities to educate doctors, dentists and veterinarians on the significant cost advantage and the convenience of the Sharps
Recovery System™ over the traditional pick-up service. The increase in billings in the Home Health Care market is a result
of increased sales to home health care related distributors addressing the growing trend of patient volumes in the home health
care industry. The increase in the Retail market billings is due to the initial orders of the Company’s TakeAway
Environmental Return System™ envelope solution by three large retail pharmacy chains and several food and drug chains to
address growing concerns regarding the hazards of unused medications in the home and environment. The increase in the
Other category is a result of referrals from the Company’s strategic alliance with a leading hazardous waste solutions
provider. The increase in the Assisted Living/ Hospitality market was primarily due to increased sales to existing customers
as they realize growth from the aging patient population using their services as well as an increase in our assisted living
facility customer base.
Cost of revenues for the year ended June 30, 2011 of $13.2 million was 67.9% of revenues. Cost of revenues for the year
ended June 30, 2010 of $15.5 million was 39.6% of revenues. The lower gross margin for the fiscal year ended June 30,
2011 of 32.1% (versus 60.4% for the prior fiscal year) was a result of lower volume. The Company, which is largely
leveraged on volume, made investments in its infrastructure during the first half of calendar year 2010 in order to provide for
the capacity to take on large increases in volume. As a result, the combination of lower volume and greater capacity creates
negative leverage and adversely impacts gross margin.
Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2011 of $9.8 million, increased by $1.0
million, from SG&A expenses of $8.8 million for the year ended June 30, 2010. The increase in SG&A expense is primarily
due to higher (i) professional expenses of $0.4 million (primarily due to regulatory and consulting related fees, legal fees,
audit and related fees, and other sales-related consulting fees), (ii) compensation and benefit expense including payroll tax of
$0.2 million (primarily due to timing of employee hires and terminations), (iii) costs associated with a legal settlement of
$0.35 million and (iv) severance costs of $0.05 million.
Regarding costs associated with a legal settlement included in SG&A expense, the Company settled a suit in which the
plaintiff alleged violations of the Telephone Consumer Protection Act. Although the Company believes it did not violate any
laws, the Company settled the lawsuit in the interest of avoiding additional legal costs and diverting time and focus from
growing the business.
20
21
YEAR ENDED JUNE 30, 2010 AS 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:
U.S. Government Contract
Health Care
Retail
Professional
Assisted Living/ Hospitality
Pharmaceutical
Core Government
Other
Subtotal
GAAP Adjustment *
Revenue Reported
23,200
6,543
4,338
1,644
1,015
742
642
1,284
39,408
(252)
39,156
6,026
7,454
1,933
1,059
917
1,558
228
1,500
20,675
(378)
20,297
17,174
(911)
2,405
585
98
(816)
414
(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
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 U.S. Government contract ($17.2 million),
Retail ($2.4 million), Professional ($0.6 million), and Core Government ($0.4 million) markets. These increases were
partially offset by decreased billings in the Health care ($1.0 million), and Pharmaceutical ($0.8 million) markets. The
increase in the U.S. Government contract 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 Core Government market also included $0.2 million related to the support of a major U.S. city immunization
program, $0.1 million 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 the significant cost advantage and the convenience of the Sharps Recovery System™ over the traditional pick-up
services. 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 $0.6 million 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 $0.1 million (primarily related to common stock issued in conjunction with the public
offering), (iii) non-cash, stock based compensation expense of $0.5 million (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 $0.7 million (primarily due to contract sales personnel, patent preparation and filing expenses, legal fees,
regulatory consulting, audit and related fees, and NASDAQ listing fees), (v) costs related to increased sales and marketing-
related activities of $0.4 million 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 $0.2 million
(primarily due to an increase in locations and software support). The fourth quarter of fiscal year 2009 was negatively
impacted a special charge of $0.5 million 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.
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.
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 6), (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.
22
23
PROSPECTS FOR THE FUTURE
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, used healthcare materials and unused dispensed medications. The Centers for Disease Control and
Prevention (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. There are an estimated 800,000 doctors, dentists, veterinarians, clinics, tattoo parlors
and other businesses in the country that generate smaller quantities of medical waste, including used syringes. These offices
and facilities, which must demonstrate proper management of their medical waste, comprise a market opportunity of
approximately $600 million, based on estimates of using our solution offerings rather than the traditional pick-up service in
what we characterize as a regulated market. 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 solution offerings including the Complete Needle™ Collection and Disposal System
(designed for the traditional under-served home self-injector), the Sharps Medical Waste Management System™, the
TakeAway line of products for unused medications (including TakeAway Environmental Return System™ ), the
Medical/Professional TakeAway Recovery System™ and the RX TakeAway 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 innovative 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. The Company continues to develop solution
offerings designed to facilitate the proper and cost effective solutions for management of medical waste, used healthcare
materials and unused dispensed medication to better serve our customers and the environment. The Company believes its
future growth will be driven by, among other items: (i) the convergence of issues regarding the environment, the cost of
health care and changes in our health care delivery system and cost-savings initiatives which influence the decision process
of our customers, (ii) the effects of the Company’s extensive multi-layered marketing and awareness efforts and (iii) the
Company’s leadership position in the development and sales of products and services designed for the proper and cost
effective solutions for management of medical waste, used healthcare materials and unused dispensed.
In August 2011, the Company introduced the Complete Needle™ Collection and Disposal System which is focused on the
traditional under-served home self-injector required to regularly use needles or syringes for their health and well-being, such
as people with diabetes. The Complete Needle™ Collection and Disposal System is actually two offerings in one. First, the
product provides the individual self-injector with a reasonably priced containment solution designed to protect self-injectors
and their family members. Second, the product includes an optional disposal feature utilizing the USPS designed to protect
the individual’s community, solid waste workers and the environment. The solution offers significant convenience as it
utilizes the same delivery channel, the retail pharmacy, that the self-injector typically uses to obtain medications, for
example, insulin, and needles or syringes. The solution is also designed to enhance the interaction between the pharmacist
and the individual thereby creating counseling opportunities and possibly better treatment outcomes.
The Sharps®MWMS™, a Medical Waste Management System (“MWMS”), 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. In February 2009, the
Company announced a $40 million contract (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 was recognized from
February 1, 2010 through January 31, 2011. In January 2011, Sharps was awarded the second option year (ending January
31, 2012) valued at approximately $3.0 million and is to be recognized from February 1, 2011 through January 31, 2012.
There is expected to be approximately $3.0 million in revenue in calendar year 2011 for the maintenance component of the
contract including $1.5 million in the second half of calendar year 2011. The remaining two 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®MWMS™, 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.
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 provided 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 allowed each of the participating 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 expanded to include eight VISN’s (encompassing twenty-two states plus the District of Columbia).
There are a total of twenty-three VISN’s in the VA System. 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. As of June 30, 2011, the VA pilot
program is winding down as the VA evaluates a broad roll-out program that would make our solutions available across all
VISN’s.
The Company believes the pace of regulation of sharps and unused dispensed medications disposal is gaining momentum at
both the state and federal level. In December 2004, the U. S. Environmental Protection Agency (“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 (see 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. In April 2011, the U.S. Senate re-introduced a bill (S.725) which, if enacted, would provide for Medicare
reimbursement, under part D, for the safe and effective disposal of used needles and syringes. To protect citizens and waste
workers from needle stick injuries, eighteen states and the District of Columbia (covering 43% of the U.S. population)
restrict or have introduced legislation to restrict discarding used sharps into household trash and twenty-nine states and the
District of Columbia (covering 65% of the U.S. population) have enacted or introduced legislation to regulate the disposal of
consumer unused medications 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.
The Company believes it is well positioned to benefit given our strict adherence to established standards and extensive
documentation and records.
The Company’s growth strategies are focused on the Retail, Pharmaceutical, Professional and Government (both Core and
U.S. Government contract) markets. The Company also serves the Home Health Care, Assisted Living/Hospitality and Other
markets. Excluding the impact of the U.S. Government contract (which had decreased billings due to the expected
conversion from the production to the maintenance phase of the contract), customer billings grew 7.5% due to increases in all
core markets except for Pharmaceutical, which can be variable based on the timing of programs. Although the
Pharmaceutical market did not experience growth in the year ended June 30, 2011, the Company expects growth in the future
from two new patient support program awards announced in August 2011 which will launch in the December 2011 quarter
and roll out over the following six-to-nine month period.
The Company currently has a cash balance of $18.3 million and no debt as of June 30, 2011. Under the Company’s Credit
Agreement (“the Credit Agreement”) with Wells Fargo, National Association, the Company had no outstanding borrowings,
$106 thousand in letters of credit outstanding, and $4.9 million of credit available.
24
25
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash and cash equivalents increased by $0.2 million to $18.3 million at June 30, 2011 from $18.1 million at June 30, 2010.
The increase in cash is due to the excess tax benefit of $1.0 million from stock-based award activity, partially offset by
capital expenditures and additions to intangible assets of $0.9 million.
Accounts receivable increased by $1.0 million to $3.0 million at June 30, 2011 from $2.0 million at June 30, 2010. The
increase is due to higher billings in June 2011.
Prepaid and other current assets decreased by $2.5 million to $0.9 million at June 30, 2011 from $3.4 million at June 30,
2010. The decrease is primarily due to a $2.7 million federal income tax refund received in April 2011.
Property, plant and equipment, net decreased by $0.3 million to $5.3 million at June 30, 2011 from $5.6 million at June 30,
2010. The decrease in property, plant and equipment is related to depreciation expense of $1.0 million partially offset by
capital expenditures of $0.7 million. The capital expenditures are attributable primarily to the purchase of, (i) computer
equipment, new website project, and custom software programming of $0.3 million, (ii) manufacturing and assembly
equipment including molds, dies and printing plates of $0.1 million primarily for new product development, (iii) treatment
facility improvement of $0.1 million including a new boiler for the incinerator, (iv) general office improvements for the
completion of the recently expanded corporate office of $0.1 million and (v) improvements on generator and circuits of $0.1
million.
Accounts payable decreased by $0.2 million to $1.0 million at June 30, 2011 from $1.2 million at June 30, 2010. The
decrease is a result of the timing of payments.
Accrued liabilities increased by $0.2 million to $1.3 million at June 30, 2011 from $1.1 million at June 30, 2010. The
increase is primarily due to the legal settlement of $0.35 million offset by year end payroll accrual reduction of $0.18 million
due to timing of pay periods.
Stockholders’ equity decreased by $1.0 million to $25.9 million at June 30, 2011 from $26.9 million at June 30, 2010. This
decrease is primarily attributable to a net loss for the year ended June 30, 2011 of $3.0 million. The impact was partially
offset by, (i) the effect on equity (credit) of non-cash stock based award expense of $0.9 million and (ii) the excess tax
benefits from stock-based award activity of $1.0 million.
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 8 Commitments and Contingencies). The Company has other off-
balance sheet obligations involving letters of credit (See Note 4 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.
The contractual obligations related to minimum lease payments under non-cancelable operating leases as of June 30, 2011
are as follows (in thousands):
Operating lease obligations
$
1,424
1,437
1,436
770
$
5,067
2012
Twelve Months Ending June 30,
2014
2013
2015
Total
Credit Facility
The Company’s Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association 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.
As of June 30, 2011, the Company had no outstanding borrowings, $106 thousand in letters of credit outstanding, and $4.9
million of credit available.
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 pays 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 2.7% as of June 30, 2011.
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. As of June 30, 2011, we are in compliance with all financial covenants. 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, 2012.
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 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.
26
27
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 2012 and
beyond.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition: The Company recognizes revenue from product sales when goods are shipped or delivered, and title
and risk of loss pass to the customer except for those sales via multiple-deliverable arrangements. Provisions for certain
rebates, product returns and discounts to customers are accounted for as reductions in sales in the same period the related
sales are recorded.
Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well
as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical
experience, trend analysis and projected market conditions in the various markets served.
The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-element arrangements.
On July 1, 2010, the Company adpoted ASU No. 2009-13 which further clarifies guidance on revenue recognition for
multiple-deliverable revenue arrangements, changing the way it allocated arrangement consideration to the separate units of
accounting. 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 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.
Prior to July 1, 2010, the individual fair value of the transportation and treatment services were determined by the sales price
of the service offered by third parties, with the fair value of compliance and container being the residual value. Beginning
July 1, 2010, under the relative selling price methodology, an estimated selling price is determined for all deliverables that
qualify for separate units of accounting. The actual consideration received in a multiple-deliverable arrangement is then
allocated to the units based on their relative sales price. 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.
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 or delivered by an alternative logistics provider to the Company’s facility. Treatment revenue is
recognized upon the destruction or conversion and proof of receipt and treatment having been performed on the container.
Since the transportation element and the treatment elements are undelivered services at the point of initial sale of the
compliance and container, transportation and treatment revenue is deferred until the services are performed. The current and
long-term portions of deferred revenues are determined through regression analysis and historical trends. Furthermore,
through regression analysis of historical data, the Company has determined that a certain percentage of all compliance and
container systems sold may not be returned. Accordingly, a portion of the transportation and treatment elements are
recognized at the point of sale.
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 did not have a material effect on the consolidated
financial statements when compared to its previous revenue recognition methodology.
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, 2011, 2010 and 2009, was $871 thousand ($67 thousand included in cost of
revenues and $804 thousand included in general and administrative expenses in the Company’ consolidated statement of
operations), $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 $1.0 million, $1.1 million and $15 thousand of excess tax benefits in its cash flows from financing
activities for the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2010, the FASB issued guidance expanding disclosure requirements related to receivables. The guidance was issued
to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit
quality of its financing receivables. The guidance is for receivables, off-balance sheet credit exposures and foreclosed and
repossessed assets. The Company’s summary of significant accounting policies shall now include: (i) basis for accounting for
loans, trade receivables, and lease financing (including those classified as held for sale), (ii) method used in determining the
lower of cost or fair value of nonmortgage loans held for sale, (iii) classification and method of accounting for interest-only
strips, loans and other receivables and (iv) method for recognizing interest income on loan and trade receivables.
In addition, the allowance for credit losses, the allowance for doubtful accounts, and as applicable any unearned income, any
unamortized premiums and discounts, and any net unamortized deferred fees and costs, shall be disclosed in the financial
statements. The Company adopted this guidance, as required for both interim and annual reporting periods, effective
December 15, 2010. The adoption of this guidance does not impact the Company’s consolidated results of operations or
financial position. The Company has included its Accounts Receivable policy in Note 2 – Summary of Significant
Accounting Policies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have exposure to significant financial market risk including commodity price risk, foreign currency
exchange risk or interest rate risk. Management does not use derivative instruments. The Company has limited exposure to
changes in interest rates due to its lack of indebtedness. The Company maintains a credit agreement under which we may
borrow funds in the future. The Company does not currently forsee any borrowing needs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 included herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
28
29
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, 2011 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, 2011.
Changes in Internal Controls
During the quarter ended June 30, 2011, 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.
The Company’s internal control over financial reporting as of June 30, 2011 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 17, 2011.
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, 2011, all Section 16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
Management's Report on Internal Control over Financial Reporting
The Audit Committee
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
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, 2011.
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, 2011, the Company's internal control over financial reporting was effective based on those
criteria.
The Audit Committee is comprised of certain directors of the Company who are not employees of the Company or any of its
subsidiaries. Messrs. Zerrillo (Chairman), Dalton, and Parker 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
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
30
31
Regulation 14A with the SEC, relating to its Annual Meeting of Stockholders to be held on November 17, 2011.
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 17, 2011.
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 17, 2011.
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 17,
2011.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
Exhibit
Number
2.1
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
10.1
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).
Amended and Restated Bylaws of Sharps Compliance Corp dated May 23, 1994 (incorporated by
reference to Exhibit 3.2 to Form 8-K, filed November 19, 2011).
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
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).*
10.2
Executive Employment Agreement by and between Sharps Compliance Corp. and Ronald E. Pierce
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
10.18
10.19
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).
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).*
32
33
filed September 7, 2010).
10.39
Sharps Compliance Corp. 2010 Stock Plan dated November 22, 2010 (incorporated by reference to
10.40
10.41
14.10
21.1
23.1
31.1
the Registrant’s Form S-8, filed on November 22, 2010).
Employment Agreement by and between Sharps Compliance, Inc. and Ramsey E. Hashem dated
December 1, 2010 (incorporated by reference to Exhibit 10.1 and Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K, filed December 1, 2010).
Employment Agreement by and between Sharps Compliance, Inc. and Gregory C. Davis dated
May 18, 2011 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K, filed May 18, 2011).
Sharps Compliance Corp. Code of Ethics (incorporated by reference to Exhibit 14.1 to the
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.
10.20
10.21
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
10.34
10.35
10.36
10.37
10.38
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 10.3 to the Registrant’s Current Report on
Form 8-K, filed June 14, 2010).*
Contract No. V797P-DSNS-9005 dated January 29, 2009 by and between the Department of
Veterans Affairs and Sharps Compliance Corp. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, 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 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).
Separation Agreement between Sharps Compliance and Dr. Burton J. Kunik dated September 7,
2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K,
filed September 7, 2010).
Consulting Agreement between Sharps Compliance and Dr. Burton J. Kunik dated September 7,
2011 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K,
34
35
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2011 and 2010
Consolidated Statements of Operations for the Years Ended June 30, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended June 30, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
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: September 1, 2011
SHARPS COMPLIANCE CORP.
By: /s/ DAVID P. TUSA
David P. Tusa
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: September 1, 2011
Dated: September 1, 2011
Dated: September 1, 2011
Dated: September 1, 2011
Dated: September 1, 2011
Dated: September 1, 2011
By: /s/ DAVID P. TUSA
David P. Tusa
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ DIANA P. DIAZ
Diana P. Diaz
Vice President
Chief Financial Officer
(Principal Financial Officer)
By: /s/ F. GARDNER PARKER
F. Gardner Parker
Chairman of the Board Of Directors
By: /s/ JOHN W. DALTON
John W. Dalton
Director
By: /s/ PARRIS H. HOLMES, JR.
Parris H. Holmes, Jr.
Director
By: /s/ PHILIP C. ZERRILLO
Philip C. Zerrillo
Director
36
F- 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sharps Compliance Corp.
We have audited the accompanying consolidated balance sheets of Sharps Compliance Corp. (a Delaware
corporation) and subsidiaries (collectively, the “Company”) as of June 30, 2011, and 2010, and the related
consolidated statements of operations, stockholders’ equity and cash flows for each of the three fiscal years in the
period ended June 30, 2011. 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 Sates). 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, 2011, and 2010, and the
consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended June
30, 2011, 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, 2011, 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 September 1, 2011 expressed
an unqualified opinion on the effective operation of internal control over financial reporting.
/s/ UHY LLP
Houston, Texas
September 1, 2011
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, 2011, 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, 2011, 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, 2011, and 2010,
and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three fiscal
years in the period ended June 30, 2011, and our report dated September 1, 2011 expressed an unqualified opinion
on those consolidated financial statements.
/s/ UHY LLP
Houston, Texas
September 1, 2011
F-2
F-3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value amounts)
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share data)
June 30,
2011
2010
2011
Year Ended June 30,
2010
2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents…………………………………………………………
Accounts receivable, net of allowance for doubtful accounts of $26 and
$21, respectively…………………………………………………………………
Inventory……………………………………………………………………………
Prepaids and other current assets……………………………………………………
Deferred income taxes………………………………………………………………
TOTAL CURRENT ASSETS……………………………………………………
$
18,280
3,065
1,770
857
203
24,175
PROPERTY, PLANT AND EQUIPMENT, net……………………………………
5,350
DEFERRED INCOME TAXES, non-current………………………………………
INTANGIBLE ASSETS, net of accumulated amortization of $227 and
$196, respectively…………………………………………………………………
748
325
$
18,068
2,033
1,738
3,369
83
25,291
5,631
503
207
TOTAL ASSETS……………………………………………………………………
$
30,598
$
31,632
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable……………………………………………………………………
Accrued liabilities…………………………………………………………………
Deferred revenue……………………………………………………………………
TOTAL CURRENT LIABILITIES………………………………………………
$
965
1,260
1,724
3,949
LONG-TERM DEFERRED REVENUE……………………………………………
RENT ABATEMENT………………………………………………………………
401
383
$
1,220
1,079
1,375
3,674
583
434
REVENUES………………………………………………………………
$
19,395
COSTS AND EXPENSES
Cost of revenues…………………………………………………………
Selling, general and administrative……………………………………
Special charge…………………………………………………………
Depreciation and amortization…………………………………………
TOTAL COSTS AND EXPENSES…………………………………
13,171
9,837
570
353
23,931
OPERATING INCOME (LOSS)………………………………………
(4,536)
OTHER INCOME (EXPENSE)
Interest income…………………………………………………………
Other income (expense) ………………………………………………
TOTAL OTHER INCOME (EXPENSE)……………………………
55
(10)
45
$
39,156
$
20,297
15,502
8,815
-
441
24,758
14,398
37
-
37
9,841
6,604
-
388
16,833
3,464
27
6
33
INCOME (LOSS) BEFORE INCOME TAXES…………………………
(4,491)
14,435
3,497
INCOME TAX EXPENSE (BENEFIT)
Current…………………………………………………………………
Deferred…………………………………………………………………
TOTAL INCOME TAX EXPENSE (BENEFIT)……………………
(1,226)
(290)
(1,516)
3,528
1,551
5,079
121
(821)
(700)
NET INCOME (LOSS) …………………………………………………
$
(2,975)
$
9,356
$
4,197
NET INCOME (LOSS) PER COMMON SHARE
Basic…………………………………………………………………
$
(0.20)
$
0.66
$
0.33
Diluted…………………………………………………………………
$
(0.20)
$
0.63
$
0.30
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
INCOME (LOSS) PER COMMON SHARE:
TOTAL LIABILITIES……………………………………………………………
4,733
4,691
Basic…………………………………………………………………
Diluted…………………………………………………………………
14,944
14,944
14,176
14,952
12,908
13,996
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value per share; 20,000,000 shares authorized;
15,053,316 and 14,891,754 shares issued and outstanding, respectively………
Additional paid-in capital…………………………………………………………
Retained earnings …………………………………………………………………
TOTAL STOCKHOLDERS' EQUITY……………………………………………
151
21,602
4,112
25,865
149
19,705
7,087
26,941
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY………………………
$
30,598
$
31,632
See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements
F-4
F-5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
(Deficit)
Total
Stockholders'
Equity
12,580,183
435,100
$
126
4
$
9,225
447
$
(6,466)
-
$
2,885
451
-
-
242,224
-
-
13,257,507
577,146
972,874
-
84,227
-
-
-
3
-
-
133
6
9
-
1
-
1,318
704
(3)
15
-
11,706
4,867
1,064
980
(1)
1,089
-
-
-
-
4,197
(2,269)
-
-
-
-
-
1,318
704
-
15
4,197
9,570
4,873
1,073
980
-
1,089
-
14,891,754
62,500
$
-
149
1
$
-
19,705
48
$
9,356
7,087
-
$
9,356
26,941
49
-
99,062
-
1
871
(1)
-
-
871
-
-
-
15,053,316
-
-
151
$
979
-
21,602
$
-
(2,975)
4,112
$
979
(2,975)
25,865
$
Balances, June 30, 2008
Exercise of stock options
Change in valuation
allowance related to tax
benefits of stock
compensation
Stock-based
compensation
Issuance of restricted stock
Excess tax benefit from
stock-based award
activity
Net Income
Balances, June 30, 2009
Issuance of Common Stock,
net of direct expenses
Exercise of stock options
Stock-based
compensation
Issuance of restricted stock
Excess tax benefit from
stock-based award
activity
Net Income
Balances, June 30, 2010
Exercise of stock options
Stock-based
compensation
Issuance of restricted stock
Excess tax benefit from
stock-based award
activity
Net Loss
Balances, June 30, 2011
See accompanying notes to consolidated financial statements
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)……………………………………………………………
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization………………………………………………
Loss on disposal of fixed assets ……………………………………………
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……………………………………………
Decrease (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, plant 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 offering costs…………………………
Proceeds from exercise of stock options……………………………………
NET CASH PROVIDED BY FINANCING ACTIVITIES…………………
NET INCREASE IN CASH AND CASH EQUIVALENTS
2011
Year Ended June 30,
2010
2009
$
(2,975)
1,003
10
871
(979)
(290)
(1,032)
(32)
2,512
780
167
35
(702)
(149)
(851)
979
-
49
1,028
212
$
9,356
$
4,197
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
4,792
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
$
18,068
$
4,792
CASH AND CASH EQUIVALENTS, beginning of year……………………
18,068
CASH AND CASH EQUIVALENTS, end of year……………………………
$
18,280
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid
$
-
$
5,656
$
11
F-6
F-7
See accompanying notes to consolidated financial statements
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
NOTE 1 - ORGANIZATION AND BACKGROUND
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, used
healthcare materials and unused dispensed medications. These solutions include Sharps Recovery System™
(formerly Sharps Disposal by Mail System®), TakeAway Recovery System™, Complete Needle™ Collection and
Disposal System, TakeAway Environmental Return System™, Rx TakeAway Recovery and Reporting System™,
Sharps Recovery System™ Needle Collection and Mailback Disposal, Sharps® MWMS™, Sharps Secure® Needle
Collection and Containment System, Pitch-It IV™ Poles, Trip LesSystem®, Sharps® Pump and Asset Return System,
IsoWash® Linen Recovery System and Biohazard Spill Clean-Up Kit and Disposal System.
Concentration of Customers and Service Providers: 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, 2011, two customers
represented approximately 33% of revenues. Those same two customers represented approximately 22%, or $660
thousand, of the total accounts receivable balance as of June 30, 2011. 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. 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. 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 the successful performance by 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”). The Company also maintains funds in high yield savings accounts, which are FDIC
insured up to applicable limits. 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 the Company from normal business
activities. Accounts receivable balances are determined to be delinquent when the amount is past due based on the
contractual terms with the customer. The Company maintains an allowance for doubtful accounts to reflect the
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 the Company
determines that the receivable will not be collected and/or when the account has been referred to a third party
collection agency. The Company has a history of minimal uncollectible accounts.
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, 2011, total inventory was $1.8 million of which $980
thousand was finished goods and $790 thousand was raw materials. At June 30, 2010, total inventory was $1.7
million of which $933 thousand was finished goods and $805 thousand 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.
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, 2011, 2010 and 2009, the Company recorded amortization expense of
$31 thousand, $28 thousand and $26 thousand, respectively.
As of June 30, 2011, future amortization of intangible assets is as follows (in thousands):
Year Ending June 30,
2012
2013
2014
2015
2016
Thereafter
$
30
16
8
8
8
255
325
$
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, 2011, 2010 and 2009, was $871 thousand ($67 thousand
included in cost of revenues and $804 thousand included in general and administrative expenses in the Company’s
F-8
F-9
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
consolidated statement of operations), $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 $1.0 million, $1.1
million and $15 thousand of excess tax benefits in its cash flows from financing activities for the fiscal years ended
June 30, 2011, 2010 and 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, 2011. 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
2009
2011
0.7%
67%
4.40
-
0.9%
68%
3.55
-
2.1%
61%
3.09
-
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 from product sales when goods are shipped or delivered,
and title and risk of loss pass to the customer except for those sales via multiple-deliverable arrangements. Provisions
for certain rebates, product returns and discounts to customers are accounted for as reductions in sales in the same
period the related sales are recorded.
Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants,
as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual
terms, historical experience, trend analysis and projected market conditions in the various markets served.
The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-deliverable
revenue arrangements. On July 1, 2010, the Company adopted ASU No. 2009-13 which further clarified guidance on
revenue recognition for multiple-deliverable revenue arrangements, changing the way the Company allocates
arrangement consideration to the separate units of accounting. 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 and Asset Return Boxes, referred to as “Pump Returns”) and can
consist of up to three separate elements, or units of measure, as follows: (1) the sale of the compliance and container
system, (2) return transportation and (3) treatment service.
Prior to July 1, 2010, the individual fair value of the transportation and treatment services were 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. Beginning July 1, 2010, under the relative selling price methodology, an estimated selling price is
determined for all deliverables that qualify for separate units of accounting. The actual consideration received in a
multiple-deliverable arrangement is then allocated to the units based on their relative sales price. 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 utilizes third party evidence, did not change from the prior method. The
Company estimates 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.
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 or delivered by an alternative logistics provider to the Company’s facility. Treatment
revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been performed
on the container. Since the transportation element and the treatment elements are undelivered services at the point of
initial sale of the compliance and container, transportation and treatment revenue is deferred until the services are
performed. The current and long-term portions of deferred revenues are determined through regression analysis and
historical trends. Furthermore, through regression analysis of historical data, the Company has determined that a
certain percentage of all container systems sold may not be returned. Accordingly, a portion of the transportation
and treatment elements are recognized at the point of sale.
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 did not have a material effect
on the consolidated financial statements when compared to its previous revenue recognition methodology.
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 $510 thousand, $365
thousand and $46 thousand for the fiscal years ended June 30, 2011, 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 2011, 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 $41 thousand, $31
F-10
F-11
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
thousand and $25 thousand for the fiscal years ended June 30, 2011, 2010 and 2009, respectively, and are included
in selling, general and administrative expenses. For purposes of the group health benefit plan and beginning February
1, 2011, the Company self insures an amount equal to the excess of the employees’ deductible (ranges from $1,000
for individual up to $3,000 for family coverage) up to the amount by which the third party insurance coverage begins
(ranges from $11,000 for individual up to $33,000 for family coverage). Prior to February 1, 2011, the Company
self-insured 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, 2011 and 2010 was $12 thousand and $2 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
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. The Company uses
estimates to determine many reported amounts, including but not limited to: allowance for doubtful accounts,
recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, income taxes
and valuation allowances, selling price used in multiple-deliverable arrangements and return rates used to estimate
the percentage of container systems sold that will not be returned. 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 operations. At June 30, 2011 and 2010, 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, 2008, 2009, 2010 and 2011
(cid:120) State of Texas – fiscal years ended June 30, 2007, 2008, 2009, 2010 and 2011
(cid:120) State of Georgia – fiscal years ended June 30, 2009, 2010 and 2011
The Internal Revenue Service recently conducted its audit of the Company’s U.S. Corporation Income Tax Return
for the fiscal year ended June 30, 2009. The audit resulted in no material adjustments.
Recent Accounting Pronouncements:
In July 2010, the FASB issued guidance expanding disclosure requirements related to receivables. The guidance was
issued to provide financial statement users with greater transparency about an entity’s allowance for credit losses and
the credit quality of its financing receivables. The guidance is for receivables, off-balance sheet credit exposures and
foreclosed and repossessed assets. The Company’s summary of significant accounting policies shall now include: (i)
basis for accounting for loans, trade receivables, and lease financing (including those classified as held for sale), (ii)
method used in determining the lower of cost or fair value of nonmortgage loans held for sale, (iii) classification and
method of accounting for interest-only strips, loans and other receivables and (iv) method for recognizing interest
income on loan and trade receivables.
In addition, the allowance for credit losses, the allowance for doubtful accounts, and as applicable any unearned
income, any unamortized premiums and discounts, and any net unamortized deferred fees and costs, shall be
disclosed in the financial statements. The Company adopted this guidance, as required for both interim and annual
reporting periods, effective December 15, 2010. The adoption of this guidance does not impact the Company’s
consolidated results of operations or financial position. The Company has included its Accounts Receivable policy 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 – PROPERTY, PLANT AND EQUIPMENT
At June 30, 2011 and 2010, 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,
2011
$
179
4,897
222
1,421
949
19
7,687
2,337
2010
$
166
4,654
222
1,122
872
19
7,055
1,424
Net property, plant and equipment
$
5,350
$
5,631
Total depreciation expense in the fiscal years ended June 30, 2011, 2010 and 2009 is $972 thousand, $768 thousand
and $392 thousand, respectively. Depreciation expense included in cost of revenues in the fiscal years ended 2011,
2010 and 2009 was $650 thousand, $355 thousand and $31 thousand, respectively.
F-12
F-13
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
NOTE 5 - INCOME TAXES (continued)
The Company’s Credit Agreement with Wells Fargo Bank, National Association 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. As of
June 30, 2011, the Company had no outstanding borrowings, $106 thousand in letters of credit outstanding, and $4.9
million of credit available.
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 pays a fee of 0.2% per annum on the unused amount
of the line of credit. The Company estimates that the interest rate applicable to the borrowings under the Credit
Agreement would be approximately 2.7% as of June 30, 2011.
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. As of June 30, 2011, the Company is in compliance with all the financial covenants. 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. The Credit Agreement
expires on July 15, 2012.
NOTE 5 - INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
Year ended June 30,
2010
2009
2011
Current
Federal
State
$
(1,161)
(65)
(1,226)
$
3,206
322
3,528
$
74
47
121
Deferred
Federal
State
(305)
15
(290)
(1,516)
$
1,535
16
1,551
5,079
$
(821)
-
(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, 2011, 2010 and 2009 is as follows:
2011
Year Ended June 30,
2010
2009
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…………………………………
34.0%
1.0%
(0.4%)
0.0%
0.0%
(1.3%)
0.5%
33.8%
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)
(1) Section 199 refers to Internal Revenue Service deduction for
Income Attributable to Manufacturing Activities
For the fiscal years ended June 30, 2011, 2010 and 2009, state income taxes relate to the Texas Margin Tax and
Georgia Income Tax. For the fiscal years ended June 30, 2011, 2010 and 2009, the Company evaluated the need for
a valuation allowance 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 there was no valuation
allowance provided.
At June 30, 2011 and 2010, significant components of deferred tax assets and liabilities are approximated as follows
(in thousands):
June 30,
2011
2010
Deferred tax assets relating to:
Stock compensation……………………………………………..
AMT and research and development………………………….
Deferred rent………………………………………………………
Inventory …………………………………………………………
Professional fees…………………………………………………
Accrued vacation…………………………………………………
Accounts receivable allowance………………………………….
Deferred revenue…………………………………………………
Net operating loss carryforwards ………………………………
Total deferred tax assets……………………………………….
413
317
132
124
50
21
9
-
556
1,622
263
-
156
-
56
20
7
694
-
1,196
Deferred tax liablities related to depreciation differences……
(671)
(610)
Net deferred tax assets …………………………………………
$
951
$
586
During the year ended June 30, 2011, the net deferred tax asset increased $365,000, primarily due to the generation
of net operating loss carryforwards and other tax credits partially offset by the change in accounting method for
unearned revenue. During the years ended June 30, 2011 and 2010, the Company utilized $0 and $3.9 million,
respectively of net operating loss carryforwards for income tax purposes. In addition, during the years ended June
30, 2011, 2010 and 2009, $1.0 million, $1.1 million, and $0.0 million, respectively, of benefit was recorded to
additional paid in capital which related to excess tax deductions for stock compensation accounted for in
F-14
F-15
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
NOTE 5 - INCOME TAXES (continued)
NOTE 7 - STOCK BASED COMPENSATION (continued)
accordance with the FASB’s guidance as it related to stock-based compensation.
As of June 30, 2011, 2010 and 2009, options available for grant under the Plans are as follow:
At June 30, 2011, the Company had net operating loss and various tax credit carryforwards which expire as follows
(dollars in millions):
Carryforwards
June 30, 2011
Expiration Date
Net operating loss
Research and development credit
Mininum tax credit
$
1.6
0.2
0.1
June 30, 2032
June 30, 2031
Indefinite
NOTE 6 - EQUITY TRANSACTIONS
During the years ended June 30, 2011, 2010 and 2009, stock options to purchase shares of the Company’s common
stock were exercised as follows:
Year Ended June 30,
2010
2009
2011
Options Exercised
Proceeds (in thousands)
Average exercise price per share
62,500
$
49
$
0.78
972,874
$
1,073
$
1.10
435,100
$
451
$
1.04
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) was available to
be used for general corporate purposes, including expansion of its product offerings, facilities and infrastructure to
meet the continued expected growth of the Company.
NOTE 7 - STOCK BASED COMPENSATION
The Company sponsors the Sharps Compliance Corp. 2010 Stock Plan (the “2010 Plan”) covering employees,
consultants and non-employee directors. The 2010 Stock Plan replaced the Sharps Compliance Corp. 1993 Stock
Plan (the “1993 Plan”). The 2010 Plan provides for the granting of stock-based compensation (stock options or
restricted stock) of up to 1,000,000 shares of the Company’s common stock of which 176,500 shares are outstanding
as of June 30, 2011. Options granted generally vest over a period of three years and expire seven years after the date
of grant. Restricted stock generally vests over one year.
The 1993 Plan, as amended, provided for the granting of stock-based compensation (stock options or restricted
stock) of up to 4,000,000 shares of the Company’s common stock of which 711,626 shares are outstanding as of
June 30, 2011. Options granted generally vest over a period of three years and expire seven years after the date of
grant. Restricted stock generally vested between one to three years.
F-16
June 30,
2011
2010
2009
2010 Stock
Plan
1993 Stock
Plan
754,000
-
-
122,673
105,173
536,006
Total
876,673
105,173
536,006
The summary of activity for all stock options during the fiscal years ended June 30, 2011, 2010 and 2009 is
presented in the table below (in thousands):
Balance, June 30, 2008……………… #
Granted…………………………… #
Exercised………………………… #
Forfeited or canceled……………. #
Balance, June 30, 2009……………… #
Granted…………………………… #
Exercised………………………… #
Forfeited or canceled……………. #
Balance, June 30, 2010……………… #
Granted…………………………….
Exercised…………………………..
Forfeited or canceled…………….
Balance at June 30, 2011………..
#
Exercisable at June 30, 2011………
Options
Outstanding
1,657
206
(435)
(30)
1,398
416
(973)
(49)
792
243
(63)
(84)
888
504
(1) Excludes 72 thousand shares of Restricted Stock
(2) Excludes 30 thousand shares of Restricted Stock
(3) Excludes 0 shares of Restricted Stock
Weighted
Average
Exercise
Price
$
$
$
$
1.10
2.10
1.04
2.82
$
$
$
$
1.17
7.12
1.10
5.57
$
$
$
$
4.21
4.55
0.79
5.46
(1)
(2)
$
4.43
(3)
$
3.52
The summary of activity for all restricted stock during the fiscal years ended June 30, 2011, 2010 and 2009 is
presented in the table below (in thousands):
2011
Year Ended June 30,
2010
2009
Unvested at beginning of the year
Granted
Vested
Forfeited
Unvested at end of the year
30
70
(100)
-
-
F-17
72
52
(84)
(10)
30
101
307
(242)
(94)
72
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
NOTE 7 - STOCK BASED COMPENSATION (continued)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
The weighted average fair value per share of restricted stock granted during the fiscal years ended June 30, 2011,
2010, and 2009 was $4.65, $9.81 and $2.07, respectively. The weighted average fair value per share of restricted
stock which vested during the fiscal years ended June 30, 2011, 2010 and 2009 was $4.41, $6.78 and $3.35,
respectively.
The following table summarizes information about stock options outstanding as of June 30, 2011 (in thousands
except per share amount):
Options Outstanding
Range of Exercise
Price
Outstanding
as of
June 30, 2011
$0.00 - $1.99
$2.00 - $3.99
$4.00 - $5.99
$6.00 - $7.99
$8.00- $10.00
152
186
330
1
219
888
Weighted
Average
Remaining
Life
(in Years)
1.26
4.02
6.35
5.67
5.89
Weighted
Average
Exercise
Price
$
$
$
$
$
$
0.79
2.36
4.49
6.60
8.60
4.43
The following table summarizes information about stock options outstanding and exercisable as of June 30, 2011 (in
thousands except per share amount):
leases for warehouses for 5 years and for office space 10 years. Rent expense for the fiscal years ended June 30,
2011, 2010 and 2009 was $1.5 million, $1.2 million and $436 thousand, respectively.
Future minimum lease payments under non-cancelable operating leases as of June 30, 2011 are as follows (in
thousands):
Year Ending June 30,
2012
2013
2014
2015
$
1,424
1,437
1,436
770
$
5,067
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. The
Company complied with such purchase commitments through June 30, 2011.
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.
Options Exercisable
NOTE 9 - EARNINGS PER SHARE
Range of Exercise
Price
Exercisable as
of
June 30, 2011
$0.00 - $1.99
$2.00 - $3.99
$4.00 - $5.99
$6.00 - $7.99
$8.00- $10.00
152
186
51
1
114
504
Weighted
Average
Remaining
Life
(in Years)
1.26
4.02
5.96
5.67
6.58
Weighted
Average
Exercise
Price
$
$
$
$
$
$
0.79
2.36
4.46
6.60
8.58
3.52
As of June 30, 2011, there was $608 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 2.0 years
NOTE 8 - 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
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
are included in basic common shares outstanding, and unvested restricted shares are included in the diluted common
shares outstanding if the effect is dilutive.
F-18
F-19
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011, 2010 and 2009
Exhibit 21.1
Subsidiaries of the Registrant
NOTE 9 - EARNINGS PER SHARE (continued)
The following information is necessary to calculate earnings per share for the periods presented (in thousands, except
per share amount):
Name
Jurisdiction of Incorporation
Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.)
Texas
Delaware
Texas
Delaware
Delaware
Net income (loss), as reported…………………………………………
$
(2,975)
$
9,356
$
4,197
Year Ended June 30,
2011
2010
2009
Sharps e-Tools.com, Inc.
Sharps Safety, Inc.
Sharps Manufacturing, Inc.
Weighted average common shares outstanding………………………
Effect of dilutive stock options………………………………………
Weighted average diluted common shares outstanding………………
14,944
-
14,944
14,176
776
14,952
12,908
1,088
13,996
Sharps Environmental Services, Inc. (dba Sharps Environmental
Services of Texas, Inc.)
Net income (loss) per common share
Basic…………………………………………………………………
Diluted………………………………………………………………
$
$
(0.20)
(0.20)
$
$
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………………………………………………………
550
241
-
NOTE 10 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following tables show quarterly financial information for the years ended June 30, 2011 and June 30, 2010. The
Company believes that all necessary adjustments have been included in the amounts below to present fairly the
results of such periods.
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,
2010
$
$
$
$
$
5,233
3,421
(1,222)
(797)
(0.05)
14,907
December 31,
2010
$
$
$
$
$
4,611
3,385
(1,200)
(807)
(0.05)
14,920
March 31,
2011
$
$
$
$
$
4,518
3,109
(1,118)
(659)
(0.04)
14,948
June 30, 2011
$
5,033
$
3,256
$
(996)
$
(712)
(0.05)
$
15,000
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
F-20
F-21
Exhibit 23.1
Exhibit 31.1
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 September 1, 2011, with respect to the consolidated
financial statements of Sharps Compliance Corp. and subsidiaries as of June 30, 2011, and 2010, and for each of the
three fiscal years in the period ended June 30, 2011, and to our report dated September 1, 2011 on the effectiveness
of Sharps Compliance Corp. and subsidiaries’ internal control over financial reporting as of June 30, 2011, included
in this Annual Report on Form 10-K for the year ended June 30, 2011.
/s/ UHY LLP
Houston, Texas
September 1, 2011
CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 302 OF THE
SARBANES-OXLEY ACT
I, David P. Tusa, certify that:
1.
I have reviewed this 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: September 1, 2011
/s/ DAVID P. TUSA
David P. Tusa
Chief Executive Officer and President
F-22
F-23
Exhibit 31.2
Exhibit 32.1
CERTIFICATION OF CHIEF FINANCIAL OFFICER IN ACCORDANCE WITH SECTION 302 OF THE
SARBANES-OXLEY ACT
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, 2011, as filed with the Securities and Exchange Commission on the date hereof, I, David
P. Tusa, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:
(1) The Form 10-K report for the year ended June 30, 2011, filed with the Securities and Exchange
Commission on September 1, 2011, 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, 2011 fairly
presents, in all material respects, the financial condition and results of operations of Sharps
Compliance Corp.
Date: September 1, 2011
By: /s/ DAVID P. TUSA
David P. Tusa
Chief Executive Officer and President
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: September 1, 2011
/s/ DIANA P. DIAZ
Diana P. Diaz
Vice President
Chief Financial Officer
F-24
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, 2011, as filed with the Securities and Exchange Commission on the date hereof, I, Diana
P. Diaz, 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:
(1) The Form 10-K report for the year ended June 30, 2011, filed with the Securities and Exchange
Commission on September 1, 2011, 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, 2011 fairly
presents, in all material respects, the financial condition and results of operations of Sharps
Compliance Corp.
Date: September 1, 2011
By: /s/ DIANA P. DIAZ
Diana P. Diaz
Vice President and
Chief Financial Officer
F-26
David P. Tusa
Chief Executive Offi cer and President
Claude A. Dance
Senior Vice President,
Sales & Marketing
Diana P. Diaz, CPA
Vice President and
Chief Financial Offi cer
Gregory C. Davis
Vice President
of Operations
Khairan “Al” Aladwani
Vice President,
Quality Control / Assurance
F. Gardner Parker (3)
Chairman of the Board
Parker Investments
Houston, Texas
John W. Dalton (1) (2) (3) (4)
Private Investor
Houston, Texas
Parris H. Holmes (1)
Private Investor
San Antonio, Texas
David P. Tusa
Chief Executive Offi cer and President
Houston, Texas
Philip C. Zerrillo, Ph.D. (2) (3) (4)
Full professor (practice)
Executive Director of
Postgraduate Professional Studies
Executive Director of Case Writing Initiatives
Singapore Management University
(1) Member of the Compensation Committee
(2) Member of Corporate Governance Committee
(3) Member of the Audit Committee
(4) Member of the Corporate Governance Committee
Ticker Symbol
NASDAQ: SMED
Annual Shareholder Meeting
November 17, 2011, at 10:00 AM CT
J.W. Marriott-Houston
Austin Room
5150 Westheimer Road
Houston, TX 77056
Transfer Agent
For services such as change of address,
replacement of lost certifi cates and
changes in registered ownership or for
inquires 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:
Diana Diaz
Vice President and Chief Financial Offi cer
Phone: 713.660.3547
ddiaz@sharpsinc.com
Deborah Pawlowski
Kei Advisors LLC
Investor Relations
Phone: 716.843.3908
dpawlowski@keiadvisors.com
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
9220 Kirby Drive • Suite 500
Houston, Texas 77054
713-432-0300
www.sharpsinc.com