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2012 Annual Report
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9220 Kirby Drive • Suite 500
Houston, Texas 77054
713-432-0300
www.sharpsinc.com
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SHARPS
SOLUTIONS:
Sharps fi rst-of-its-kind
Waste Conversion Process™
keeps medical waste and
unused medications out of
our landfi lls for a greener,
healthier planet.
758 million syringes
repurposed into a material
powering over 250 homes
per year.
Sharps Collected
320,000 lbs. of unused
medications, reducing
potential harm to citizens
and the earth.
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Headquartered in Houston, Texas, Sharps Compliance is a leading
full-service provider of solutions for the cost-eff ective management of
medical waste, used healthcare materials and unused dispensed
medications. Its strategy is to capture a large part of the estimated
$3.8 billion untapped market for its solutions by targeting the major
agencies that are interrelated with this medical waste stream, including
pharmaceutical manufacturers, home healthcare providers, retail pharmacies
and clinics, the U.S. government and the professional market which is
comprised of physicians, dentists and veterinary practices. As a fully
integrated medical waste management company providing customer
solutions and services, the Company’s solid business model, which
provides strong margins and signifi cant operating leverage, combined
with its early penetration into emerging markets, uniquely positions it
for strong future growth.
The Company’s fl agship product, the Sharps® Recovery System™ is a
comprehensive solution for the containment, transportation, treatment
and tracking of medical waste and used healthcare materials. The
Company’s TakeAway Environmental Return System™ is designed for
individual consumers, retail or mail-order pharmacies, communities
and facilities including assisted living, long-term care and correction
operations to facilitate the proper disposal of unused dispensed
medications. The Complete Needle Collection & Disposal System™ is a
safe, easy-to-use and cost-eff ective solution designed for self-injecting
consumers and includes the Company’s containment, packaging, return
shipping via the U.S. Postal Service, tracking and treatment.
The Company has partnered with Daniels Sharpsmart in a joint
marketing alliance to serve the entire U.S. medical waste market,
offering customers a blended product portfolio to effectively target
healthcare customers with multi-site and multi-size locations. The
alliance also enables a team effort for cross selling each company’s
capabilities where best suited.
2012 Billings by Market
[FY12 $21.8 million]
Home Healthcare
Retail
Professional
Pharmaceutical
U.S. Government
Assisted Living / Hospitality
Others
Core Government
31.5%
24.1%
13.9%
9.8%
7.7%
6.0%
5.1%
1.9%
www.sharpsinc.com.
CORPORATE AND
MANAGEMENT INFORMATION
David P. Tusa
Chief Executive Offi cer
and President
Claude A. Dance
Executive 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,
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F. Gardner Parker
Chairman of the Board
Parker Investments
Houston, Texas
John W. Dalton (1)* (2) (3)
Private Investor
Houston, Texas
Parris H. Holmes (1) (2)*
Private Investor
San Antonio, Texas
Renee P. Tannenbaum, Pharm. D. (1) (3)
President
Myrtle Potter & Company, LLC
San Francisco, California
Chief Executive Offi cer and President
Houston, Texas
Philip C. Zerrillo, Ph.D. (2) (3) *
Full professor (practice)
Executive Director of
Postgraduate Professional Studies
Executive Director of
Case Writing Initiatives
Singapore Management University
(1) Member of Compensation Committee
(2) Member of Corporate Governance Committee
(3) Member of Audit Committee
* Committee Chairman
Quality Control / Assurance
David P. Tusa
Annual Shareholder Meeting
November 15, 2012, at 10:00 AM CT
Ticker Symbol
NASDAQ: SMED
Hilton Houston Post Oak
Aesops Room
2001 Post Oak Blvd.
Houston, TX 77056
Transfer Agent
For services such as change of address,
replacement of lost certifi cates and changes
in registered ownership or for inquiries to
your account, contact:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Phone: 800.368.5948
www.rtco.com
Investor Relations
Investors, stockbrokers, security analysts
and others seeking information about
the Company should contact:
Diana P. Diaz, CPA
Vice President and Chief Financial Offi cer
Phone: 713.660.3547
ddiaz@sharpsinc.com
Deborah K. Pawlowski
Kei Advisors LLC
Investor Relations
Phone: 716.843.3908
dpawlowski@keiadvisors.com
Additional information is
available on our website at:
www.sharpsinc.com
by writing to the Company at:
Sharps Compliance Corp.
Investor Relations
9220 Kirby Drive, Suite 500
Houston, Texas 77054
Materials may be obtained, without charge,
Independent Public Accountants
UHY L.L.P.
Houston, Texas
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[ 2008-2012]
5-YEAR
FINANCIAL
HIGHLIGHTS
(in thousands, except employee and per share data)
PERFORMANCE
Revenue
Gross Profi t
Gross Margin
20121
20112
2010
20093
2008
$ 21,787
$ 6,541
$ 19,395
$ 39,156
$ 20,297
$ 12,841
$
6,224
$ 23,654
$ 10,456
$ 5,070
30.0 %
32.1 %
60.4 %
51.5 %
39.5 %
Selling, General and Administrative
$ 8,609
$
9,837
$ 8,815
Operating Income (Loss)
$ (2,521 )
$
(4,536 )
$ 14,398
$
$
6,092
$ 4,783
3,464
$
(1 )
(11.6 ) %
(23.4 )%
36.8 %
17.1 %
0.0 %
Diluted Earnings (Loss) Per Share
$ (0.24 )
$
(0.20)
$ (3,621 )
$ (2,975)
$
$
9,356
$
4,197
0.63
$
0.30
$
$
82
0.01
Weighted Average Shares Outstanding–Diluted
15,109
14,944
14,952
13,996
13,540
YEAR–END FINANCIAL POSITION
Operating Margin
Net Income (Loss)
Cash and Cash Equivalents
Total Assets
Long-term Debt
$ 17,498
$ 27,638
$ 18,280
$ 18,068
$
4,792
$ 2,035
$ 30,598
$ 31,632
$ 15,188
$ 5,676
Shareholders’ Equity
$ 23,180
$ 25,865
$ 26,941
$
–
$
–
$
-
$
$
-
$
-
9,570
$ 2,886
OTHER YEAR–END DATA
Depreciation and Amortization
$ 1,117
$
1,003
$
796
$
418
$
266
Number of Employees
56
57
67
43
33
1 Operating loss includes $300,000 of one-time expense related to the Atlanta facility lease obligation. Net loss also includes a $2.0 million charge for a deferred tax valuation allowance.
2 Operating loss 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.
3 Operating income includes a special charge of $512,000 in 2009 related to the departure of a former offi cer of the Company.
1
2012 LETTER TO
STOCKHOLDERS
Dear Fellow Stockholders,
self-injecting consumers. This product joins our unused dispensed medications
product – the TakeAway System™ and, combined, increases our exposure on the
shelves of over 26,000 leading retail pharmacies across the country.
We believe our success at gaining entry into the consumer arena was the
result of leveraging our long standing relationships with our retail pharmacy
customers for whom we manage the medical waste for their fl u shot and other
immunization programs.
During Fiscal 2012, we continued to build the necessary momentum for higher
One of our largest opportunities for growth is in the professional market, as
rates of growth. We focused on strengthening our core markets and brand
there are an estimated 800,000 doctors, dentists, veterinarians and other small
awareness, announced a strategic marketing alliance with the second largest
quantity generators of medical waste, many of which are unaware of our solutions.
medical waste service provider in the country, Daniels Sharpsmart, Inc. and
In fiscal 2012, we grew billings in this market by more than 50%. Given the
continued to innovate with our off erings.
CORE TARGET MARKET GROWTH –
OPPORTUNITIES AND PIPELINE REMAIN STRONG
We increased our core billings, which exclude the U.S. Government contract,
significant scope of this market, we have employed a variety of aggressive
inside sales initiatives, web-based sales, multi-media marketing programs and
promotional campaigns to increase our market share. Of note, we believe our
marketing alliance with Daniels elevates many opportunities in this market as
well as other markets that we could not capture previously.
by over 15% year-over-year, and while we reported a net loss in fi scal 2012,
Our pharmaceutical manufacturer market also experienced substantial
we believe we have demonstrated continued progress in capturing opportunities
growth in fi scal 2012. We landed three new patient support programs in the
in our target markets.
year and continued to gain traction with the pharmaceutical manufacturers as
We broadened our consumer product off erings during the year by introducing
they realize the value add our program provides them in their relationship with
our Complete Needle Collection & Disposal System™, which is designed for
their patients.
REVENUE
(IN MILLIONS)
´08
´09
´10
´11
´12
$40
35
30
25
20
15
10
5
0
2
$14
12
10
8
6
4
2
0
-2
-4
OPERATING
(IN MILLIONS)
SHAREHOLDERS’
EQUITY
(IN MILLIONS)
$30
25
20
15
10
5
0
´08
´09
´10
´11
´12
´08
´09
´10
´11
´12
Capturing
Opportunities
Through disciplined
performance Sharps
delivers results in
our targeted markets.
RETAIL
MARKET
(IN MILLIONS)
$5.5
4.4
3.3
2.2
1.1
0.0
´08
´09
´10
´11
´12
$4.0
3.0
2.0
1.0
0.0
PROFESSIONAL
MARKET
(IN MILLIONS)
PHARMACEUTICAL
MARKET
(IN MILLIONS)
$2.5
2.0
1.5
1.0
0.5
0.0
´08
´09
´10
´11
´´12
´08
´09
´10
´11
´12
“During Fiscal 2012, we
continued to build the
necessary momentum for
higher rates of growth.
”
STRENGTHENING AWARENESS FOR SUSTAINABLE GROWTH
In addition to growing in our targeted markets, we are intent upon helping build
public awareness of our convenient, environmentally sound, and cost-eff ective
solutions for the safe and proper disposal of medical waste, used healthcare
materials and unused medications. State, local and agency programs that provide
our solutions, such as our program with the Iowa Pharmacy Association and the
State of Iowa, appear to be multiplying. For example, the Nebraska MEDS Coalition
and cities in California are developing plans to provide our products in their regions.
Our strong optimism regarding our future is substantiated by the measurable
number of high-quality initiatives that we are developing with signifi cant
players in the retail pharmacy, medical and dental, veterinarian, clinic, and
pharmaceutical manufacturer markets. Our strong balance sheet provides us the
STRATEGIC MARKETING RELATIONSHIP
In May 2012, we announced our joint marketing alliance with Daniels Sharpsmart
Inc. Together we can serve the entire U.S. medical waste market by off ering a
fl exibility to internally fund our growth as we work to successfully execute these
blended product portfolio to eff ectively address multi-site and multi-size
initiatives.
healthcare and related facilities. In this eff ort, we combined our easy-to-use and
As we look to the future, all of us at Sharps Compliance continue to challenge
cost-eff ective mail back solutions and our compliance and training services with
ourselves to reach new heights, serve our customers well and continually
Daniels pickup services to create a complete solution for healthcare providers to
innovate to increase our rate of growth. Thank you for your continued trust
manage their medical waste. Although still in the early stages, the alliance has been
and support.
very well received by current and prospective customers.
Sincerely,
CONTINUED PRODUCT INNOVATION
We continue to demonstrate our innovation with the introduction of
ComplianceTRACSM, a more advanced version of our compliance and training
program. This web-based program is designed to improve worker safety while
satisfying applicable Occupational Safety and Health Administration (“OSHA”)
David P. Tusa
and other requirements. We expect this product will contribute noticeably to our
President and Chief Executive Offi cer
initiatives going forward, as it provides our current and prospective customers with
September 28, 2012
a convenient solution for maintaining regulatory compliance.
3
USED SYRINGES
COLLECTED:
I
S
N
O
T
U
L
O
S
CIRCLES THE
EARTH2.4
TIMES
59,817
MILES OF
SYRINGES
ALIGNED
END TO END
SHARPS IS COMMITTED to protecting the
environment and has demonstrated an ongoing commitment to
greening its products and practices for the benefit of customers,
communities, and the environment. Recently, we’ve made great strides
in our environmental eff orts, researching innovative ways to continue
reducing medical waste and partnering with other leaders in healthcare
sustainability.
Every day outside the hospital setting, signifi cant volumes of medical
waste are discarded daily in settings such as private homes, clinics and
long-term care facilities, resulting in threats to public health and landfi ll
saturation.
In 2010 we developed PELLA-DRX™, a patented green
Waste Conversion Process™ that repurposes discarded medical waste
into a new resource capable of powering homes, reducing the
Company’s use of landfi lls to zero.
More recently, Sharps has partnered with several local communities
and municipalities across the country to launch pilot programs to
educate consumers about the dangers of pharmaceutical and medical
waste and provide residents with options for environmentally
responsible disposal.
Our solutions have allowed Sharps to repurpose 758 million syringes
and collect 320,000 pounds of unused medications, substantially
reducing our carbon footprint on the environment.
R
O
320,000 LBS.
UNUSED
MEDICATIONS
COLLECTED:160 TONS
4
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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, 2012
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:134)(cid:3) No (cid:134)(cid:3)
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:134) No (cid:134)
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:134)(cid:3)No (cid:134)
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:134)(cid:3) No (cid:134)
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:134)
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:134)
Accelerated filer (cid:134)
Non-accelerated filer (cid:134) Smaller reporting company (cid:134)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:134)(cid:3)No (cid:134)
As of December 31, 2011, the aggregate market value of the Registrant’s Common Stock held by non-affiliates was
approximately $52.1 million (based on the closing price of $4.11 on December 30, 2011 as reported by The NASDAQ
Capital Market).
The number of common shares outstanding of the Registrant was 15,206,127 as of August 27, 2012.
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 15, 2012 are incorporated by
reference into Part III.
2
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS *
ANNUAL REPORT ON FORM 10-K
PART I
Description of Business
Risk Factors
Unresolved Staff Comments
Description of Property
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Signatures
PART IV
*This Table of Contents is inserted for convenience of reference only and is not a part of this Report
as filed.
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35
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35
39
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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
health care materials and unused dispensed medications. Our solutions facilitate the proper treatment of numerous types of
items, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, or sharps,
and unused consumer dispensed prescription and over-the-counter drugs and medications. We serve customers in multiple
markets such as 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), government (federal, state and local), 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, used
healthcare materials and unused dispensed medications. Our differentiated approach provides our customers the flexibility
to return and properly treat their or their patients’ medical waste, used healthcare materials or unused dispensed medications
through a variety of solutions and products transported 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 Company continues to take advantage of the many opportunities in the markets served as professional offices, retail
pharmacies, communities, consumers, pharmaceutical manufacturers, government agencies, health care facilities, individual
self-injectors and commercial organizations become more aware of the need for the proper treatment of medical sharps
waste, used healthcare materials and unused dispensed medications as well as alternatives to traditional methods of disposal.
Recent data from the Human Capital Management Services Group indicates that the number of used needles improperly
4
disposed of outside the large healthcare setting and into the solid waste system has tripled over the past ten years to 7.8
billion each year and the number of self-injectors in the country has increased to 13.5 million over the same period. The
Company estimates that it would require over 80 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 $2 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.
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 continues to be an increase for the
Complete Needle™ which is focused on the traditional under-served home self-injector required to regularly use needles or
syringes for their health and well-being. Fourth, there is growing demand for Sharps TakeAway Environmental Recovery
System™ solutions for unused, non-controlled prescriptions and over-the-counter medications. Additionally, there is
increased competition by pharmaceutical manufacturers to differentiate themselves by offering products such as our Sharps
Recovery System® to their participants, which allows for proper containment, return and treatment of the needles or
injection devices utilized in therapy. Our proprietary SharpsTracer™ system tracks the return of the Sharps Recovery
System® by the patient to the treatment facility, where the package is scanned and weighed prior to treatment. This data is
electronically available to the pharmaceutical manufacturer which assists them in monitoring medication discipline and
provides them with a touch point for individual patient follow-up for improved outcomes. 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, the Company launched Sharps®MWMS™, a Medical Waste Management System (“MWMS”), which 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 connection with the launch in 2009, the Company 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®MWMS™, 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®MWMS™ 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
which 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 was recognized from February 1, 2011
through January 31, 2012. The Company was notified by an agency of the U. S. Government, acting on behalf of the
Division of Strategic National Stockpile (“DSNS”) that the maintenance contract would not be renewed for the third option
year (beginning February 1, 2012) and that the contract would be terminated effective January 31, 2012. This non-renewal
was preceded by a letter dated December 2, 2011 advising the Company of the U.S. Government’s intent to exercise the
third option year. Although not stated in the notice provided by the U.S. Government, the Company believes the action is
part of a budget reduction program being implemented by the DSNS.
5
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 55 full-time employees and 1 part-time employee. We have manufacturing,
assembly, distribution and warehousing operations located on Reed Road in Houston, Texas, and our corporate offices
located on Kirby Drive in Houston, Texas. We have a facility in Atlanta, Georgia. As a result of the termination of the U.S.
Government contract, the Company is attempting to buy-out or sublease the Atlanta facility lease obligation. In August
2012, the Company agreed in principle to a deal with the Atlanta facility landlord reducing its obligation under the lease for
the 51,000 square foot facility by approximately 20,000 square feet effective September 1, 2012. We own and operate a
fully-permitted treatment facility in Carthage, Texas that incorporates our processing and treatment operations.
Approximately three 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).
SOLUTIONS OVERVIEW
We offer a broad line of product and service solutions to manage the medical waste and unused dispensed medications
generated by our customers. Our primary solutions include the following:
Sharps Recovery System™ (formerly Sharps Disposal by Mail System®): a comprehensive solution for the containment,
transportation, treatment and tracking of medical waste and used health care 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, retail or mail-order pharmacies,
communities and facilities including assisted living, long-term care and correction operations to facilitate the proper disposal
of unused dispensed medications (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 safe, easy-to-use and cost-effective solution designed for self-
injecting consumers and includes the Company’s containment, packaging, return shipping via the U.S. Postal Service,
tracking and treatment. 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.
ComplianceTRACSM: a more advanced web-based version of the Company’s compliance and training program.
ComplianceTRACSM is designed to improve worker safety while satisfying applicable Occupational Safety and Health
Administration (“OSHA”) and other requirements for the end-user.
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
6
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 solutions including Pitch-It IV™ Poles, Trip LesSystem®, Sharps® Pump and Asset
Return System, Sharps Secure® Needle Collection and Containment System, Sharps® MWMS™, and Spill Kit TakeAway
Recovery System™.
MARKET OVERVIEW
The Company continues to take advantage of the many opportunities in the markets served as professional offices, retail
pharmacies, communities, consumers, pharmaceutical manufacturers, government agencies, health care facilities, individual
self-injectors and commercial organizations become more aware of the need for the proper treatment of medical sharps
waste, used healthcare materials and unused dispensed medications as well as alternatives to traditional methods of disposal.
Recent data from the Human Capital Management Services Group indicates that the number of used needles improperly
disposed of outside the large healthcare setting and into the solid waste system has tripled over the past ten years to 7.8
billion each year and the number of self-injectors in the country has increased to 13.5 million over the same period. The
Company estimates that it would require over 80 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 $2 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. 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.
The Company believes the pace of regulation of sharps and unused dispensed medications disposal is gaining momentum at
both the state and federal level. The following regulatory related events contribute to increasing awareness:
(cid:120)
(cid:120)
(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 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. In 2012, the state of Nebraska introduced a state
funded program to provide residents with options to dispose of unwanted and unused medications to
participating pharmacies;
In October 2010, the Secure and Responsible Drug Disposal Act was enacted which addresses the proper
handling of unused controlled medications;
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;
In July 2012, Alameda County in California enacted an ordinance requiring manufacturers of drugs sold or
distributed in the county to pay for the safe collection and disposal of unused medications. Pharmaceutical
7
manufacturers are required to submit their compliance plans to the county for approval by July 1, 2013;
and
(cid:120) As of June 30, 2012 approximately 46 percent of US citizens live in states that have enacted legislation or
strict guidelines mandating the proper disposal of used syringes while 67 percent live in states that have
enacted or proposed legislation mandating the proper disposal of dispensed unused medications.
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 in some cases 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 for small quantity generators. Our proprietary SharpsTracer® tracking and documentation
systems provide customers a comprehensive electronic record of receipt and treatment of their waste to meet regulatory
requirements. 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.
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. We own and
operate a fully-permitted treatment facility in Carthage, Texas, that incorporates our processing and treatment operations.
Approximately three 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 and comprehensive regulatory support 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.
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.
Our billings by market for the years ended June 30, 2012, 2011 and 2010 are below (as expressed in percentages of
revenues):
8
BILLINGS BY MARKET:
Year Ended June 30,
2011
2012
2010
Home Health Care
Retail
Professional
Pharmaceutical
U.S. Government contract
Core Government
Assisted Living/ Hospitality
Other
31%
24%
14%
10%
8%
2%
6%
5%
100%
35%
24%
10%
2%
11%
4%
6%
8%
100%
17%
11%
4%
2%
59%
2%
3%
2%
100%
Highly scalable business model.
Because of our proven business model, we can add new business while leveraging our existing infrastructure. Our facilities
are able to accommodate significant additional volume, incurring only variable costs of transportation 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.
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 strict guidelines
regarding home sharps disposal. Passed or strict guidelines related to home sharps disposal covers 46% of the U.S.
population.
In order to reduce accidental poisonings and pollution of our water and municipal water systems, 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 67% of the U.S. population. As state and federal enforcement
of these statutes increases, more companies could 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.
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. Today, most used syringes and needles as well as
unused or expired dispensed medications are 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.
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 nine plus years with the Company has 20 years of
financial, accounting, business and public company experience in multiple industries and in companies with revenues up to
$500 million. Mr. Claude Dance, Executive 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.
9
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 and operations-related experience. Mr. Khairan Aladwani, Vice President of Assurance/Quality
Control, has over 25 years of quality assurance and operations experience, including medical devices, at a variety of
companies both private and public.
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.
In the fiscal year ended June 30, 2012, the Company experienced growth of over 600% or $1.8 million in the pharmaceutical
market. 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. In fiscal year 2012, we launched three new patient support programs
announced in August and October 2011. The 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.
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.
In October 2011, the Company announced the promotional program being offered for the Complete Needle™ Collection &
Disposal System in support of National Diabetes Month sponsored by a leading global insulin manufacturer and the nation’s
largest drugstore chain. Within this promotion program, the pharmaceutical manufacturer and the retail pharmacy in effect
purchased the solutions from the Company and provided it at no cost to the user through rebates and redemption codes
printed at the register. The Company believes this could serve as a model program for the country and that larger
participation and sponsorship of the offering by other retail channels as well as additional drug and ancillary product
manufacturers could follow. The Company also believes that similar sponsorship could be available for its TakeAway line
of products for unused medications.
In May 2012, the Company announced a joint marketing alliance with Daniels Sharpsmart (“JMA”) to serve the entire U.S.
medical waste market, offering clients a blended product portfolio to effectively target health care customers with multi-site
and multi-sized locations. The alliance also enables a team effort for cross selling each company’s capabilities where best
10
suited. The Company believes the JMA will assist the Company in landing larger opportunities whereby the customer has
both large and small quantity facilities generating medical waste and used healthcare materials.
Enhance sales and marketing efforts.
Through targeted telemarketing initiatives, e-commerce driven website and web-based promotional activities, we believe we
can drive significant additional growth by increasing awareness of the Company’s solution offerings.
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.
Develop new products and services.
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 TakeAway line of products for unused medications (including
TakeAway Environmental Return System™),
the
Sharps®MWMS™ and ComplianceTRACSM. 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 $1
thousand, $131 thousand and $41 thousand for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
the Medical/Professional TakeAway Recovery System™,
Increase adoption of our product lines among federal, state and local government agencies.
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. The VA Pilot was completed as
of June 30, 2012 and generated revenue of approximately $0.4 million.
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. The contract was terminated effective January 31, 2012. This non-renewal was preceded by a letter
dated December 2, 2011 advising the Company of the U.S. Government’s intent to exercise the third option year. Although
not stated in the notice provided by the U.S. Government, the Company believes the action is part of a budget reduction
program being implemented by the DSNS.
CONCENTRATION OF CREDIT AND SUPPLIERS
There is a concentration of credit risk associated with accounts receivable arising from sales to our major customers. For the
11
fiscal year ended June 30, 2012, two customers represented approximately 30% of revenues. One of these customers
represented approximately 26%, or $623 thousand, of the total accounts receivable balance at June 30, 2012. The other
customer, which had no accounts receivable balance at June 30, 2012, was a major U.S. government agency which
terminated January 31, 2012. 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. 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.
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 return transportation and 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 the government and related agencies. 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 operations.
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. We utilize national suppliers such as Southern Container and R &
D Molders for the majority of the raw materials used in our other products and solutions and international suppliers such as
Ashoka Company for Pitch-It™ IV Poles.
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, ComplianceTRACSM, 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 have a number of patents issued, including those applicable to our PELLA-DRX waste
conversion process (patent numbers US 8,163,045 and US 8,100,989) and our Sharps Secure® Needle Collection and
Containment System™ (patent numbers US 8,162,139 and US 8,235,883). We have patents pending on our Complete
Needle™ Collection & Disposal System and our Medical Waste Management System (Sharps MWMS™ rapid deployment
system).
COMPETITION
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 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
could face additional 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.
12
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 affect the incineration portion of our operation of the
treatment facility located in Carthage, Texas. These regulations modify the emission limits and monitoring procedures
required to operate an incineration facility. These new regulations and the recent receipt of a Title V permit require
additional emissions-related monitoring equipment and compliance by the end of calendar year 2012. Such changes require
us to incur capital expenditures in order to meet the requirements of the new regulations. We believe the capital expenditures
will be in the range of $300,000 to $400,000 and we expect to incur the costs during the first and second quarters of fiscal
year 2013.
13
ITEM 1A. RISK FACTORS
We may be unable to manage our growth effectively.
We experienced core revenue growth for fiscal year 2012, as we saw the benefits of our marketing activities in our target
markets, Pharmaceutical, Professional and Retail. Core revenue increased more than 16% to $20.1 million for the fiscal year
ended June 30, 2012 as we launched three patient support programs in the pharmaceutical market, almost doubled sales
through our inside and online sales efforts and served the retail market’s growing immunization business and launch of new
consumer products like Complete Needle™ Collection & Disposal System and TakeAway Environmental System™. The
increase in revenue as well as an expanded presence into 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.
Our 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, Executive 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) approved the Executive Officer Incentive
Compensation Plan for participation by certain 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 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 a concentration of credit risk associated with accounts
receivable arising from sales to our major customers. For the fiscal year ended June 30, 2012, two customers represented
approximately 30% of revenues. One of these customers represented approximately 26%, or $623 thousand, of the total
accounts receivable balance at June 30, 2012. The other customer, which had no accounts receivable balance at June 30,
2012, was a major U.S. government agency which terminated January 31, 2012. To the extent these significant customers
are delinquent or delayed in paying or we are not successful in obtaining consistent and additional business from our
existing and new customers, our results of operations and financial condition would be adversely affected.
Aggressive pricing by existing competitors and the entrance of new competitors could drive down the Company’s profits
and slow its growth.
There are several competitors who offer similar or identical products and services that facilitate the disposal of 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 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
could face additional and possibly significant competition. As a result, we could experience increased pricing pressures that
could reduce our margins. In addition, as we expand our business into other markets, the number, type and size of our
14
competitors may expand. Many of these potential competitors may have greater financial and operational resources,
flexibility to reduce prices and other competitive advantages that could adversely impact our current competitive position.
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.
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.
We are 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 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. 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 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 affect the incineration portion of our operation of the
treatment facility located in Carthage, Texas. These regulations modify the emission limits and monitoring procedures
required to operate an incineration facility. These new regulations and the recent receipt of a Title V permit require
additional emissions-related monitoring and compliance by the end of calendar year 2012. Such changes require us to incur
capital expenditures in order to meet the requirements of the new regulations. We believe the capital expenditures will be in
the range of $300,000 to $400,000 and we expect to incur the costs during the first and second quarters of fiscal year 2013.
There can be no assurance that once we incur the capital expenditures and install the related equipment that the facility will
comply with the new regulations. An inability to comply with the regulations could disrupt incinerator operations at the
treatment facility and could have a material adverse effect on our future operations.
The inability of the Company to operate its treatment facility would adversely affect its operations.
Our business utilizes a treatment facility for the proper disposal or treatment of medical waste, used health care 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 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 treatment and disposal and the operation of
the incinerator and autoclave facility. The failure to maintain the permits for the treatment facility or unfavorable conditions
contained in the permits or new regulations could substantially impair our operations and reduce our revenues. During fiscal
year 2013, the Company, under an agreement with Daniels Sharpsmart, is scheduled to begin utilizing four Daniels
Sharpsmart treatment facilities located across the country for the proper treatment of medical waste and used healthcare
materials generated by our customers. This will not only reduce the Company’s return transportation costs but also provide
back-up treatment facility capabilities in the event of disruption at the Company’s treatment facility in Carthage, Texas. 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 effect on our operations and results of operations.
15
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.
An inability to win additional government contracts could have a material adverse effect on our operations and adversely
affect our future revenue.
A material amount of our revenues were generated through a contract with a major U.S. government agency for the period
from March 2009 through the contract’s termination in January 2012 totaling $33 million. Subsequent to the contract’s
termination, our Company-wide revenues have experienced a decrease compared to prior periods. Although the Company is
attempting to secure large additional U.S. Government contracts, including programs with the Veterans Administration,
there can be no assurances that such efforts will be successful. 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.
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 return transportation and 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 the government and related agencies. 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 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
16
80,000 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 Atlanta, Georgia. Sharps has manufacturing, assembly,
distribution and warehousing operations on Reed Road in Houston, Texas, and corporate offices on Kirby Drive in Houston,
Texas. In August 2012, the Company agreed in principle to a deal with the Atlanta facility landlord reducing its obligation
under the 51,000 square foot facility in Atlanta by approximately 20,000 square feet effective September 1, 2012. The
Company is currently attempting to sublease the remaining approximately 31,000 square feet of space at the Atlanta facility.
The Company’s leases expire from April 2014 to April 2015 with options to renew the leases for warehouses for 5 years and
for office space for 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 10.9 tons per day of municipal solid waste with 10% of
this amount identified as applicable to healthcare facility generated medical waste while the autoclave is capable of treating
up to seven tons per day of medical waste.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
17
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, the Company’s common stock had an average trading volume
of approximately 1,740,297 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, 2010 through August 27, 2012) for each quarter within the last two
fiscal years.
Fiscal Year Ended June 30, 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended June 30, 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ending June 30, 2013
First Quarter (August 27, 2012)
Common Stock
High
Low
$
$
$
$
5.40
5.87
5.75
5.35
$
$
$
$
4.55
4.83
4.25
4.14
$
$
$
$
4.00
3.98
3.74
3.58
$
$
$
$
2.98
3.88
3.47
2.97
$
3.74
$
2.52
Stockholders: At August 27, 2012, there were 15,206,127 shares of common stock held by approximately 173 holders of
record. The last reported sale of the common stock on August 27, 2012 was $2.91 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.
18
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
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.
19
Securities Authorized for Issuance under Equity Compensation Plans:
The following equity compensation plan information is provided as of June 30, 2012:
Plan Category
2010 Stock Plan as approved by
shareholders (1) (3) (4)
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)
494,748
$
4.02
600,683
$
4.95
Total
1,095,431
$
4.53
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
(c)
372,384
144,173
516,557
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.
(4) Number of securities to be issued and weighted average exercise price include the effect of 17,248 shares of restricted stock issued to
the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
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):
2012
For the Year Ended June 30,
2011
2009
2010
2008
Revenues
Operating Income (Loss)
Net Income (Loss)
$
$
$
21,787
(2,521)
(3,621)
$
$
$
19,395
(4,536)
(2,975)
$
$
$
39,156
14,398
9,356
$
$
$
20,297
3,464
4,197
$
$
$
12,841
(1)
82
Net Income (Loss) per share:
Basic
Diluted
$
$
(0.24)
(0.24)
$
$
(0.20)
(0.20)
$
$
0.66
0.63
$
$
0.33
0.30
$
$
0.01
0.01
Total Assets
Total Debt
Cash and Cash Equivalents
Working Captial
Total Stockholders' Equity
27,638
$
$
-
$
17,498
$
18,607
$
23,180
30,598
$
$
-
$
18,280
$
20,226
$
25,865
31,632
$
$
-
$
18,068
$
21,617
$
26,941
15,188
$
$
-
$
4,792
$
4,566
$
9,570
5,676
$
$
-
$
2,035
$
1,896
$
2,886
20
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and
related notes appearing elsewhere in this Annual Report on Form 10-K. See “Information Regarding Forward Looking
Statements.”
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, 2012, 2011 and 2010, 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):
2012
%
Year Ended June 30,
%
2011
2010
%
Revenue
Cost of revenues
Gross profit
SG&A expense
Special charge
Depreciation and amortization
$
21,787
100.0%
$
19,395
100.0%
$
39,156
100.0%
15,246
6,541
8,609
-
453
70.0%
30.0%
39.5%
2.1%
13,171
6,224
9,837
570
353
67.9%
32.1%
50.7%
2.9%
1.8%
15,502
23,654
8,815
-
441
39.6%
60.4%
22.5%
1.1%
Operating income (loss)
(2,521)
(11.6%)
(4,536)
(23.4%)
14,398
36.8%
Other income
23
0.1%
45
0.2%
37
0.1%
Income (loss) before income taxes
(2,498)
(4,491)
14,435
Income tax expense (benefit)
Net income (loss)
1,123
(3,621)
$
5.2%
(16.6%)
(1,516)
(2,975)
$
(7.8%)
(15.3%)
5,079
9,356
$
13.0%
23.9%
21
YEAR ENDED JUNE 30, 2012 AS COMPARED TO YEAR ENDED JUNE 30, 2011
Total revenues for the fiscal year ended June 30, 2012 of $21.8 million increased by $2.4 million, or 12.3%, over the total
revenues for the fiscal year ended June 30, 2011 of $19.4 million. Billings by market are as follows (in thousands):
2012
(Unaudited)
Year Ended June 30,
2011
(Unaudited)
Variance
(Unaudited)
$
$
$
BILLINGS BY MARKET:
Home Health Care
Retail
Professional
Pharmaceutical
Assisted Living/ Hospitality
U.S. Government Contract
Core Government
Other
Subtotal
GAAP Adjustment *
Revenue Reported
6,856
5,259
3,019
2,129
1,307
1,685
419
1,114
21,788
(1)
21,787
6,859
4,641
2,007
304
1,287
2,089
699
1,619
19,505
(110)
19,395
(3)
618
1,012
1,825
20
(404)
(280)
(505)
2,283
109
2,392
$
$
$
*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 Pharmaceutical ($1.8 million), Professional
($1.0 million) and Retail ($0.6 million) markets. These increases in billings were partially offset by decreased billings in the
U.S. Government Contract ($0.4 million), Core Government ($0.3 million) and Other ($0.5 million) markets. The increase
in the Pharmaceutical market billings is due to the timing of customer orders including the launch of three new patient
support programs announced in August and October 2011 and resupply orders for existing patient support programs. The
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. The increase in the Professional market was a direct result of the Company’s targeted telemarketing activities, e-
commerce focused website, trade show participation and internet-based promotional 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 the Retail market is primarily due to sales from a strong 2011 flu shot season,
orders in advance of the 2012 flu shot season, immunizations administered in the retail setting and the initial fill of the
Complete Needle™ Collection & Disposal System in two major retail pharmacy chains as well as several food and drug
chains. Partially offsetting this increase was prior year sales of $1.6 million related 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. U.S.
Government Contract billings are associated with the Company’s contract with a major U.S. government agency announced
in February 2009. The decrease in the U.S. Government contract market billings is associated with the January 31, 2012
termination of the maintenance portion of a U. S. Government contract with the Division of Strategic National Stockpile
(“DSNS”) of the Centers for Disease Control (“CDC”). The level of Core Government market billings reflects the
completion of the VA Pilot Program. The Other market consists of sales that vary due to timing of orders which order
22
primarily from distributors.
Cost of revenues for the year ended June 30, 2012 of $15.2 million was 70.0% of revenues. Cost of revenues for the year
ended June 30, 2011 of $13.2 million was 67.9% of revenue. The lower gross margin for the year ended June 30, 2012 of
30.0% (versus 32.1% for the year ended June 30, 2011) was due to ongoing facility costs associated with the maintenance
portion of the U.S. government contract that was terminated as of January 31, 2012 and the recording of a $0.3 million
accrued loss related to the Atlanta facility lease obligation.
Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2012 of $8.6 million, decreased by $1.2
million, from SG&A expenses of $9.8 million for the year ended June 30, 2011. The decrease in SG&A is primarily due to
(i) lower professional fees of $0.5 million (primarily due to regulatory and consulting fees, legal fees and other sales-related
consulting fees), (ii) prior year unusual costs associated with a legal settlement of $0.35 million, (iii) lower compensation
and benefit expense including payroll tax of $0.2 million (primarily due to timing of employee hires and terminations) and
(iv) lower miscellaneous expense of $0.2 million (primarily related to prior year severance costs and recruiting fees).
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 and (ii)
non-cash stock-based compensation expense of $0.1 million (resulting from accelerated vesting of stock option awards). 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 $2.5 million for the year ended June 30, 2012 compared to an operating loss of
$4.5 million for the year ended June 30, 2011. The operating margin was (11.6%) for the year ended June 30, 2012
compared to (23.4%) for the year ended June 30, 2011. The improvement in operating loss is a result of the higher sales
volume as well as strong cost discipline and focused use of resources on targeted markets primarily Retail, Pharmaceutical,
Professional and Core Government markets (discussed above).
The Company generated a loss before income taxes of $2.5 million for year ended June 30, 2012 versus a loss before income
taxes of $4.5 million for the year ended June 30, 2011. The improvement in loss before income taxes is a result of a lower
operating loss (discussed above).
The Company’s effective tax rate for the year ended June 30, 2012 was 45.0% compared to (33.8%) for the year ended June
30, 2011. During the year ended June 30, 2012, the Company recorded $2.0 million to establish a deferred tax valuation
allowance on net deferred tax assets. The establishment of valuation allowances and development of projected annual
effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence,
as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a
valuation allowance on deferred tax assets. Under generally accepted accounting principles, the valuation allowance has
been recorded to reduce our net deferred tax asset to an amount that is more likely than not to be realized and is based upon
the uncertainty of the realization of certain federal and state deferred assets related to net operating loss carryforwards and
other tax attributes. Excluding the impact of the valuation allowance, the effective tax rate benefit was relatively flat at
(33.5%) for the year ended June 30, 2012 compared to (33.8%) for the year ended June 30, 2011.
The Company generated a net loss of $3.6 million for year ended June 30, 2012 compared to a net loss of $3.0 million for
the year ended June 30, 2011. The higher net loss was primarily due to the $2.0 million deferred tax valuation allowance
(discussed above) offset by the improved loss before income taxes from fiscal year 2011 to 2012 (discussed above).
The Company reported diluted loss per share of ($0.24) for the year ended June 30, 2012 versus diluted loss per share of
($0.20) for year ended June 30, 2011. The decrease in diluted loss per share is a result of a higher net loss (discussed above).
23
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)
$
$
$
*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 billings for the year ended June 30, 2011 were for
maintenance and the fiscal year 2010 billings included (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
24
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.
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 income taxes of $4.5 million for the year ended June 30, 2011 versus income before
income taxes of $14.4 million for the year ended June 30, 2010. The decrease in income before income taxes 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 a 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).
25
PROSPECTS FOR THE FUTURE
The Company continues to take advantage of the many opportunities in the markets served as professional offices, retail
pharmacies and clinics, communities, assisted
living, home healthcare companies, consumers, pharmaceutical
manufacturers, government agencies, health care facilities, individual self-injectors and commercial organizations become
more aware of the need for the proper treatment of medical sharps waste, used healthcare materials and unused dispensed
medications as well as alternatives to traditional methods of disposal.
Recent data from the Human Capital Management Services Group indicates that the number of used needles improperly
disposed of outside the large healthcare setting and into the solid waste system has tripled over the past ten years to 7.8
billion each year and the number of self-injectors in the country has increased to 13.5 million over the same period. The
Company estimates that it would require over 80 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 $2 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 TakeAway line of products for unused
medications (including TakeAway Environmental Return System™) and the Medical/Professional TakeAway Recovery
System. 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 Company continues to add 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®
26
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. The VA Pilot, which was
completed in the first quarter of fiscal year 2012, was conducted in 22 states plus the District of Columbia. The VA is
contemplating a nationwide rollout of the program, making the solutions available to veterans across the country. There can
be no assurances that the VA will launch such a nationwide rollout and, if so, would purchase the Company’s solutions.
In February 2009, the Company launched Sharps®MWMS™, a Medical Waste Management System (“MWMS”), which 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 connection with the launch in 2009, the Company 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®MWMS™, 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®MWMS™ 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, the Company was awarded the first option year (ending January 31, 2011) valued at approximately $1.6
million which 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 was recognized from February 1,
2011 through January 31, 2012. The Company was notified by an agency of the U. S. Government, acting on behalf of the
DSNS, that the maintenance contract would not be renewed for the third option year (beginning February 1, 2012) and that
the contract would be terminated effective January 31, 2012. This non-renewal was preceded by a letter dated December 2,
2011 advising the Company of the U.S. Government’s intent to exercise the third option year. Although not stated in the
notice provided by the U.S. Government, the Company believes the action is part of a budget reduction program being
implemented by the DSNS.
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). From 2009 through 2012,
programs to address proper disposal of unused medications have been implemented in the states of Iowa, North Dakota,
Minnesota and Nebraska. In October 2010, the Secure and Responsible Drug Disposal Act was enacted which addresses the
proper handling of unused controlled medications. 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. In July 2012, Alameda County in California passed an ordinance requiring manufacturers of drugs sold or
distributed in the county to pay for the safe collection and disposal of unused medications. Pharmaceutical manufacturers
must submit their compliance plans to the county for approval by July 1, 2013. As of June 30, 2012, approximately 46
percent of U.S. citizens live in states that have enacted legislation or strict guidelines mandating the proper disposal of used
syringes while 67 percent live in states that have enacted or proposed legislation mandating the proper disposal of dispensed
unused medications. 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 Core Government markets.
The Company also serves the Home Health Care, Assisted Living/Hospitality and Other markets. The Pharmaceutical
market billings for the year ended June 30, 2012 increased $1.8 million over the prior year as a result of timing of customer
orders including resupply orders for existing patient support programs and the launch during the period of three new patient
support programs announced in August and October 2011.
In October 2011, the Company announced the promotional program being offered for the Complete Needle™ Collection &
Disposal System in support of National Diabetes Month sponsored by a leading global insulin manufacturer and the nation’s
largest drugstore chain. Within this promotion program, the pharmaceutical manufacturer and the retail pharmacy in effect
purchased the solutions from the Company and provided it at no cost to the user through rebates and redemption codes
27
printed at the register. The Company believes this could serve as a model program for the country and that larger
participation and sponsorship of the offering by other retail channels as well as additional drug and ancillary product
manufacturers could follow. The Company also believes that similar sponsorship could be available for its TakeAway line
of products for unused medications.
In May 2012, the Company announced a joint marketing alliance with Daniels Sharpsmart (“JMA”) to serve the entire U.S.
medical waste market, offering clients a blended product portfolio to effectively target health care customers with multi-site
and multi-sized locations. The alliance also enables a team effort for cross selling each company’s capabilities where best
suited. The Company believes the JMA will assist the Company in landing larger opportunities whereby the customer has
both large and small quantity facilities generating medical waste and used healthcare materials.
In July 2012, the Company announced the launch of ComplianceTRACSM, a web-based compliance and training program
designed to improve worker safety while satisfying applicable Occupational Safety and Health Administration ("OSHA")
and other requirements. ComplianceTRACSM was developed and launched to provide our current and prospective customers
and their employees with a convenient solution to improve workplace safety while complying with ongoing applicable
regulatory requirements. The ComplianceTRACSM program is a one-stop, interactive module, which includes online digital
video training, comprehension testing, and training certificates for both Bloodborne Pathogens ("BBP") and the Health
Insurance Portability and Accountability Act of 1996 (HIPAA). The ComplianceTRACSM program also provides
management and tracking tools to make recordkeeping easy, as well as MSDS management with access to millions of
MSDSs, OSHA safety plans builder, and audits.
The Company currently has a cash balance of $17.5 million and no debt as of June 30, 2012. As of the date of issuance of
the Annual Report, the Company had $2.1 million of credit available pursuant to its amended credit agreement.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash and cash equivalents decreased by $0.8 million to $17.5 million at June 30, 2012 from $18.3 million at June 30, 2011.
The decrease in cash is due primarily to capital expenditures and additions to intangible assets of $0.6 million.
Accounts receivable decreased by $0.6 million to $2.4 million at June 30, 2012 from $3.0 million at June 30, 2011. The
decrease is due to timing of billings and cash collections.
Inventory increased by $0.4 million to $2.2 million at June 30, 2012 from $1.8 million at June 30, 2011. The increase in
inventory is due to buildup of new product lines in preparation for new programs.
Prepaid and other current assets decreased by $0.5 million to $0.4 million at June 30, 2012 from $0.9 million at June 30,
2011. The decrease is primarily due to a $0.5 million federal income tax refund received in April 2012.
Accounts payable decreased by $0.2 million to $0.8 million at June 30, 2012 from $1.0 million at June 30, 2011. The
decrease is a result of the timing of payments.
Accrued liabilities increased by less than $45 thousand to $1.3 million at June 30, 2012 from $1.3 million at June 30, 2011.
The increase is due to the $0.3 million associated with the anticipated termination or sublease of the Atlanta, Georgia lease
obligation, offset by the payment of a legal settlement of $0.35 million recorded in fiscal year 2011.
Working capital decreased $1.6 million to $18.6 million at June 30, 2012 from $20.2 million at June 30, 2011. The decrease
is primarily due to decreases in cash and cash equivalents, accounts receivable and prepaid and other current assets (as
discussed above) offset by higher inventory and lower accounts payable as result of the timing of payments (as discussed
above).
Property, plant and equipment, net decreased by $0.7 million to $4.6 million at June 30, 2012 from $5.3 million at June 30,
2011. The decrease in property and equipment is related to depreciation expense of $1.1 million, partially offset by capital
expenditures of $452 thousand. The capital expenditures are attributable primarily to the purchase of, (i) computer
equipment, new website project and custom software programming of $181 thousand, (ii) general leasehold improvements
and warehouse equipment of $134 thousand, (iii) manufacturing and assembly equipment including molds, dies and printing
28
plates of $91 thousand primarily for new product development and (iv) treatment facility equipment of $46 thousand.
Deferred income taxes were reduced to $0 at June 30, 2012 by a $2.0 million deferred tax valuation allowance recorded in
fiscal year 2012 to reduce the deferred asset to an amount that is more likely than not to be realized and is based upon the
uncertainty of the realization of certain federal and state deferred assets related to net operating loss carryforwards and other
tax attributes.
Stockholders’ equity decreased by $2.7 million to $23.2 million at June 30, 2012 from $25.9 million at June 30, 2011. This
decrease is primarily attributable to a net loss for the year ended June 30, 2012 of $3.6 million. The impact was partially
offset by, (i) the effect on equity (credit) of non-cash stock based award expense of $0.8 million and (ii) the excess tax
benefits from stock-based award activity of $0.1 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 in the consolidated financial
statements). The Company has other off-balance sheet obligations involving letters of credit (See Note 4 Notes Payable and
Long-Term Debt in the consolidated financial statements).
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 the Company decides to cancel or
terminate a lease before the end of its term, the Company 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, 2012 are as follows (in thousands):
Operating lease obligations
$
1,465
1,477
797
-
$
3,739
2013
Twelve Months Ending June 30,
2014
2015
2016
Total
As a result of the termination of the U.S. Government contract, the Company is attempting to buy-out or sublease the
Atlanta facility lease obligation. In August 2012, the Company agreed in principle to a deal an agreement with the Atlanta
facility landlord reducing its obligation under the lease for the 51,000 square foot facility by approximately 20,000 square
feet effective September 1, 2012. The sublease agreement would reduce the operating lease obligations by $87 thousand,
$101 thousand and $59 thousand for the twelve months ending June 30, 2013, 2014 and 2015, respectively.
Credit Facility
On July 13, 2012, the Company executed the First Amendment to Credit Agreement (the “Amendment”) with Wells Fargo,
National Association (the “Bank”). The Amendment extends the maturity date of the Credit Agreement (the “Credit
Agreement”) executed on July 15, 2010 from July 15, 2012 to July 15, 2014. The Company’s Credit Agreement with the
Bank 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. Pursuant to the Amendment, the aggregate principal amount of advances outstanding at any time under
the Credit Agreement shall not exceed the Borrowing Base which is equal to (i) 80% of Eligible Accounts Receivable (as
defined in the Amendment) plus (ii) 40% of Eligible Inventory (as defined in the Amendment). As of June 30, 2012, the
Company had no outstanding borrowings and $108 thousand in letters of credit outstanding. As of the date of issuance of the
Annual Report, the Company had $2.1 million of credit available pursuant to its amended credit agreement.
Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets. Borrowings bear interest
at either (i) a fluctuating rate per annum equal to LIBOR plus a margin of 250 basis points or (ii) at the Company’s option, a
fixed rate for a 30, 60, or 90 day period set at the option date’s LIBOR plus a margin of 250 basis points. Any outstanding
revolving loans, and accrued and unpaid interest, will be due and payable on July 15, 2014, the maturity date set under the
Amendment. 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 Amendment would be approximately 3.0% as of June 30, 2012.
29
The Amendment and Credit Agreement contain affirmative and negative covenants that, among other things, require the
Company to maintain a minimum level of tangible net worth of $21 million, not exceed a ratio of liabilities to tangible net
worth of 1.0 to 1.0 and achieve positive annual net income for the fiscal year ending June 30, 2013 (determined ninety days
thereafter). As of June 30, 2012, the Company was in compliance with all applicable financial covenants. The Amendment
and Credit Agreement also contain 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 line of credit with the Bank will be sufficient to fund operations for the twelve months ending June 30, 2013.
Treatment Facility
The Company’s treatment facility in Carthage, Texas includes an incinerator which is currently permitted at a capacity of
10.9 tons per day with 10% of this designated for healthcare facility generated medical waste. Approximately three years
ago, the Company supplemented the treatment facility’s existing incineration process with an autoclave system and
technology capable of treating up to seven tons per day of medical waste at the same facility. Autoclaving 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. The autoclave system is not impacted
by the EPA amended Clean Air Act (discussed below). 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).
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 incineration portion of our operation
of the treatment facility located in Carthage, Texas. These regulations modify the emission limits and monitoring
procedures required to operate an incineration facility. These new regulations and the recent receipt of a Title V permit
require additional emissions-related monitoring and compliance by the end of calendar year 2012. Such changes will require
the Company to incur capital expenditures in order to meet the requirements of the new regulations. We believe the capital
expenditures will be in the range of $300,000 to $400,000 and we expect to incur the costs during the first and second
quarters of fiscal year 2013.
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 2013 and
beyond.
30
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 adopted 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.
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.
The establishment of valuation allowances and development of projected annual effective tax rates requires significant
judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and
verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on
deferred tax assets.
31
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, 2012, 2011 and 2010, was $786 thousand ($68 thousand included in cost of
revenues and $718 thousand included in general and administrative expenses in the Company’s consolidated statement of
operations), $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) and $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), 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 $0.1 million, $1.0 million,
and$1.1 million of excess tax benefits in its cash flows from financing activities for the fiscal years ended June 30, 2012,
2011 and 2010, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
There are no recently issued accounting pronouncements that impact the Company’s consolidated financial statements as of
June 30, 2012.
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.
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, 2012 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, 2012.
Changes in Internal Controls
During the quarter ended June 30, 2012, 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.
32
CEO and CFO Certifications
Appearing immediately following the Signatures section of this report are certifications of the CEO and the CFO. The
Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certifications). This Item of this Annual Report on Form 10-K, which you are currently reading is the information
concerning the Evaluation referred to in the Section 302 Certifications and this information, should be read in conjunction
with the Section 302 Certifications for a more complete understanding of the topics presented.
Management's Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company's internal control over
financial reporting is a process designed to provide reasonable assurance to our management and board of directors
regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in
accordance with accounting principles generally accepted in the United States.
The internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All
internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error
and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can
provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of
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, 2012.
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, 2012, the Company's internal control over financial reporting was effective based on those
criteria.
The Company’s internal control over financial reporting as of June 30, 2012 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.
33
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 15, 2012.
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, 2012, all Section 16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
The Audit Committee
The Audit Committee is comprised of certain directors of the Company who are not employees of the Company or any of its
subsidiaries. Messrs. Zerrillo (Chairman) and Dalton, and Mme. Tannenbaum 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. Zerrillo 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
Regulation 14A with the SEC, relating to its Annual Meeting of Stockholders to be held on November 15, 2012.
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 15, 2012.
34
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 15, 2012.
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
15, 2012.
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
10.2
10.3
10.4
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).*
Executive Employment Agreement by and between Sharps Compliance Corp. and Ronald E.
Pierce dated July 14, 2003 (incorporated by reference to Exhibit 10.2 to the Registrant’s Annual
Report on Form 10-KSB, filed September 26, 2003).*
Executive Employment Agreement by and between Sharps Compliance Corp. and David P. Tusa
dated July 14, 2003 (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report
on Form 10-KSB, filed September 26, 2003).*
Executive Employment Agreement by and between Sharps Compliance Corp. and Michael D.
Archer dated July 14, 2003 (incorporated by reference to Exhibit 10.2 to the Registrant’s Annual
Report on Form 10-KSB, filed September 26, 2003).*
35
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
10.20
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).*
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).
Restricted Stock Award Agreement dated July 2, 2007, by and between Sharps Compliance Corp.
and Ramsay Gillman (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K, filed July 2, 2007).
Letter Agreement by and between Sharps Compliance Corp. and David C. Mayfield dated April
10, 2007 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-
K, filed April 10, 2007).*
Letter Agreement by and between Sharps Compliance Corp. and Claude A. Dance dated
December 26, 2007 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report
on Form 8-K, filed December 26, 2007).*
Letter Agreement by and between Sharps Compliance Corp. and Al Aladwani dated March 24,
2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K,
filed March 12, 2008).*
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).
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).
36
10.21
10.22
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).
10.23
Sharps Compliance Corp. 1993 Stock Plan, as amended (incorporated by reference from Annex A
of the Registrant’s Proxy Statement on Schedule 14A, filed October 21, 2008)
10.24
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).
10.25
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).*
10.26
10.27
10.28
10.29
10.31
10.32
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,
filed September 7, 2010).
10.33
Sharps Compliance Corp. 2010 Stock Plan dated November 22, 2010 (incorporated by reference to
the Registrant’s Form S-8, filed on November 22, 2010).
10.34
10.35
10.36
10.37
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).
Executive Employment Agreement Amendment between Sharps Compliance, Inc. and David P.
Tusa dated March 6, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K, filed March 7, 2012).*
37
10.39
10.40
10.41
10.42
Executive Employment Agreement Amendment between Sharps Compliance, Inc. and Claude A.
Dance dated March 6, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K, filed March 7, 2012).*
Executive Employment Agreement Amendment between Sharps Compliance, Inc. and Diana P.
Diaz dated March 6, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current
Report on Form 8-K, filed March 7, 2012).*
First Amendment to Credit Agreement dated July 13, 2012, by and between Sharps Compliance,
In. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed on July 17, 2012).
Line of Credit Note dated July 13, 2012, 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 on July 17, 2012).
14.10
Sharps Compliance Corp. Code of Ethics (incorporated by reference to Exhibit 14.1 to the
Registrant’s Current Report on Form 10-KSB, filed on September 20, 2004).
21.1
23.1
31.1
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.
38
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
SHARPS COMPLIANCE CORP.
Dated: August 30, 2012
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: August 30, 2012
Dated: August 30, 2012
Dated: August 30, 2012
Dated: August 30, 2012
Dated: August 30, 2012
Dated: August 30, 2012
Dated: August 30, 2012
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/ RENEE P. TANNENBAUM
Renee P. Tannenbaum
Director
By: /s/ PHILIP C. ZERRILLO
Philip C. Zerrillo
Director
39
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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, 2012 and 2011
Consolidated Statements of Operations for the Years Ended June 30, 2012, 2011 and 2010
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended June 30, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
F-1
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, 2012, and 2011, 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, 2012. 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, 2012, and 2011, and the
consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended
June 30, 2012, 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, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 30, 2012 expressed
an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ UHY LLP
Houston, Texas
August 30, 2012
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Sharps Compliance Corp.
We have audited Sharps Compliance Corp. (a Delaware corporation) and subsidiaries’ internal control over
financial reporting as of June 30, 2012, 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, 2012, 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, 2012, and 2011,
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, 2012, and our report dated August 30, 2012 expressed an unqualified
opinion on those consolidated financial statements.
/s/ UHY LLP
Houston, Texas
August 30, 2012
F-3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $28 and
$26, respectively
Inventory
Prepaids and other current assets
Deferred income taxes, net
TOTAL CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT, net
DEFERRED INCOME TAXES, non-current, net
INTANGIBLE ASSETS, net of accumulated amortization of $257 and
$227, respectively
June 30,
2012
2011
$
17,498
$
18,280
2,427
2,219
398
-
22,542
4,632
-
464
3,065
1,770
857
203
24,175
5,350
748
325
TOTAL ASSETS
$
27,638
$
30,598
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued liabilities
Deferred revenue
TOTAL CURRENT LIABILITIES
LONG-TERM DEFERRED REVENUE
OTHER LONG-TERM LIABILITIES
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value per share; 20,000,000 shares authorized;
15,206,127 and 15,053,316 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
TOTAL STOCKHOLDERS' EQUITY
$
752
1,302
1,881
3,935
$
965
1,260
1,724
3,949
358
165
401
383
4,458
4,733
152
22,537
491
23,180
151
21,602
4,112
25,865
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
27,638
$
30,598
See accompanying notes to consolidated financial statements
F-4
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share data)
REVENUES
Cost of revenues
GROSS PROFIT
Selling, general and administrative
Special charge
Depreciation and amortization
2012
Year Ended June 30,
2011
2010
$
21,787
$
19,395
$
39,156
15,246
6,541
8,609
-
453
13,171
6,224
9,837
570
353
15,502
23,654
8,815
-
441
14,398
37
-
37
OPERATING INCOME (LOSS)
(2,521)
(4,536)
OTHER INCOME (EXPENSE)
Interest income
Other expense
TOTAL OTHER INCOME
36
(13)
23
55
(10)
45
INCOME (LOSS) BEFORE INCOME TAXES
(2,498)
(4,491)
14,435
INCOME TAX EXPENSE (BENEFIT)
Current
Deferred
TOTAL INCOME TAX EXPENSE (BENEFIT)
88
1,035
1,123
(1,226)
(290)
(1,516)
3,528
1,551
5,079
NET INCOME (LOSS)
$
(3,621)
$
(2,975)
$
9,356
NET INCOME (LOSS) PER COMMON SHARE
Basic
$
(0.24)
$
(0.20)
$
0.66
Diluted
$
(0.24)
$
(0.20)
$
0.63
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
INCOME (LOSS) PER COMMON SHARE:
Basic
Diluted
15,109
15,109
14,944
14,944
14,176
14,952
See accompanying notes to consolidated financial statements
F-5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
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
Exercise of stock options
Stock-based compensation
Issuance of restricted stock
Excess tax benefit from
stock-based award activity
Net loss
Common Stock
Shares
Amount
Additional Paid-in
Capital
Retained
Earnings (Deficit)
Total Stockholders'
Equity
13,257,507
$
133
$
11,706
$
(2,269)
$
9,570
577,146
972,874
-
84,227
-
-
14,891,754
62,500
-
99,062
-
-
15,053,316
89,443
-
63,368
-
-
6
9
-
1
-
-
149
1
-
1
-
-
151
-
-
1
-
-
4,867
1,064
980
(1)
1,089
-
19,705
48
871
(1)
979
-
21,602
65
786
(1)
85
-
-
-
-
-
-
9,356
7,087
-
-
-
-
(2,975)
4,112
-
-
-
-
(3,621)
4,873
1,073
980
-
1,089
9,356
26,941
49
871
-
979
(2,975)
25,865
65
786
-
85
(3,621)
Balances, June 30, 2012
15,206,127
$
152
$
22,537
$
491
$
23,180
See accompanying notes to consolidated financial statements
F-6
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used in)
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:
Decrease (increase) in accounts receivable, net
(Increase) decrease in inventory
Decrease (increase) in prepaid and other current assets
(Decrease) increase in accounts payable and accrued liabilities
Increase in deferred revenue
NET CASH (USED IN) 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
2012
Year Ended June 30,
2011
2010
$
(3,621)
$
(2,975)
$
9,356
1,117
83
786
(85)
1,035
638
(449)
459
(388)
114
(311)
(452)
(169)
(621)
85
-
65
150
1,003
10
871
(979)
(290)
(1,032)
(32)
2,512
780
167
35
(702)
(149)
(851)
979
-
49
1,028
212
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
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(782)
CASH AND CASH EQUIVALENTS, beginning of year
18,280
18,068
CASH AND CASH EQUIVALENTS, end of year
$
17,498
$
18,280
$
18,068
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid
$
-
$
-
$
5,656
See accompanying notes to consolidated financial statements
F-7
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 1 - ORGANIZATION AND BACKGROUND
Organization: The accompanying consolidated financial statements include the financial transactions and accounts
of Sharps Compliance Corp. and its wholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps
Compliance, Inc.), Sharps e-Tools.com, Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc., Sharps Environmental
Services, Inc. (dba Sharps Environmental Services of Texas, Inc.) and Sharps Safety, Inc. (collectively, “Sharps” or
the “Company”). All significant intercompany accounts and transactions have been eliminated upon consolidation.
Business: Sharps is a leading full-service provider of cost-effective management solutions for small quantity
generators of 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™, Compliance
TRACSM, Sharps Secure® Needle Collection and Containment System™, Pitch-It IV™ Poles, Trip LesSystem®,
Sharps® Pump and Asset Return System, and Spill Kit TakeAway Recovery 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, 2012, two
customers represented approximately 30% of revenues. One of the customers represented approximately 26%, or
$623 thousand, of the total accounts receivable balance as of June 30, 2012. The other customer, which had no
accounts receivable balance at June 30, 2012, was a major U.S. government agency which terminated January 31,
2012. 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. The Company may be adversely affected by its dependence on a limited number of high volume
customers.
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. Sharps maintains relationships with multiple raw materials suppliers and vendors in order to meet customer
demands and assure availability of our products and solutions. With respect to the Sharps Recovery System™
(formerly Sharps Disposal by Mail System®) solutions, the Company owns all proprietary molds and dies and utilize
three contract manufacturers for the production of the primary raw materials. Sharps believes that alternative
suitable contract manufacturers are readily available to meet the production specifications of our products and
solutions. The Company utilizes national suppliers such as Southern Container and R & D Molders for the majority
of the raw materials used in our other products and solutions and international suppliers such as Ashoka Company
for Pitch-It™ IV Poles.
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
F-8
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2012, total inventory was $2.2 million of which $1.0
million was finished goods and $1.2 million was raw materials. At June 30, 2011, total inventory was $1.8 million
of which $980 thousand was finished goods and $790 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 treatment facility in
Carthage, Texas, (ii) seven patents (two acquired in June 1998, one in November 2003, one in January 2012, two in
April 2012 and one in August 2012), and (iii) defense costs related to certain existing patents. Permit costs related
to the facility are amortized over the expected life of the treatment facility. Patent costs are being amortized over
seventeen years, the estimated useful life of the patents. During the fiscal years ended June 30, 2012, 2011 and 2010,
the Company recorded amortization expense of $30 thousand, $31 thousand and $28 thousand, respectively.
As of June 30, 2012, future amortization of intangible assets is as follows (in thousands):
Year Ending June 30,
2013
2014
2015
2016
2017
Thereafter
$
29
34
34
34
32
301
464
$
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, 2012, 2011 and 2010, was $786 thousand
($68
F-9
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
thousand included in cost of revenues and $718 thousand included in general and administrative expenses in the
Company’s consolidated statement of operations), $871 thousand ($67 thousand included in cost of revenues and
$804 thousand included in general and administrative expenses in the Company’s consolidated statement of
operations) and $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), 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 $0.1 million, $1.0 million and $1.1
million of excess tax benefits in its cash flows from financing activities for the fiscal years ended June 30, 2012,
2011 and 2010, 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. 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
2012
Year Ended June 30,
2011
2010
0.3%
66%
3.89
-
0.7%
67%
4.40
-
0.9%
68%
3.55
-
For stock-based awards granted on or after July 1, 2006, the Company considers an estimated forfeiture rate for
stock options and restricted stock units 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.
F-10
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $578 thousand, $510
thousand and $365 thousand for the fiscal years ended June 30, 2012, 2011 and 2010, 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 and 2010. During 2012, an impairment loss of $70,000 was recognized related to the
leasehold improvements at the Atlanta, Georgia facility.
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 $38 thousand,
F-11
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
$41 thousand and $31 thousand for the fiscal years ended June 30, 2012, 2011 and 2010, 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, 2012 and 2011 was $18 thousand
and $12 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. The establishment of valuation allowances and development of projected annual
effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative
evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the
appropriateness of recording a valuation allowance on deferred tax assets.
Uncertain Tax Positions: Under the accounting guidance for the uncertainty of income taxes, the income tax
provision reflects the full benefit of all positions that will be taken in the Company’s income tax returns, except to
the extent that such positions are uncertain and fall below the recognition requirements of the guidance. In the event
that the Company determines that a tax position meets the uncertainty criteria, an additional liability or benefit will
result. The Company periodically reassesses the tax positions reflected in tax returns for open years based on the
latest information available and determines whether any portion of the tax benefits reflected therein should be
treated as an unrecognized tax benefit. The amount of unrecognized tax benefit requires management to make
significant assumptions about the expected outcomes of certain tax positions included in filed or yet to be filed tax
returns. At June 30, 2012 and 2011, the Company did not have any uncertain tax positions. Tax return filings which
are subject to review by federal and state tax authorities by jurisdiction are as follows:
(cid:120) United States – fiscal years ended June 30, 2009, 2010, 2011 and 2012
(cid:120) State of Texas – fiscal years ended June 30, 2007, 2008, 2009, 2010, 2011 and 2012
(cid:120) State of Georgia – fiscal years ended June 30, 2009, 2010, 2011 and 2012
The Internal Revenue Service recently completed an 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. None of the Company’s
federal or state tax returns are currently under examination. The Company records income tax related interest and
penalties, if applicable, as a component of the provision for income tax expense. However, there were no such
amounts recognized in the consolidated statements of operations.
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.
F-12
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Recent Accounting Pronouncements: There are no recently issued accounting pronouncements that impact the
Company’s consolidated financial statements as of June 30, 2012.
Reclassifications: Certain reclassifications have been made in prior period financial statements to conform to current
period presentation. These reclassifications had no effect on the financial position, results of operations or cash
flows of the Company.
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
At June 30, 2012 and 2011, 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,
2012
$
192
5,122
222
1,558
854
19
7,967
3,335
2011
$
179
4,897
222
1,421
949
19
7,687
2,337
Net property, plant and equipment
$
4,632
$
5,350
Total depreciation expense in the fiscal years ended June 30, 2012, 2011 and 2010 is $1.1 million, $972 thousand
and $768 thousand, respectively. Depreciation expense included in cost of revenues in the fiscal years ended 2012,
2011 and 2010 was $664 thousand, $650 thousand and $355 thousand, respectively.
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
On July 13, 2012, the Company executed the First Amendment to Credit Agreement (the “Amendment”) with Wells
Fargo, National Association (the “Bank”). The Amendment extends the maturity date of the Credit Agreement (the
“Credit Agreement”) executed on July 15, 2010 from July 15, 2012 to July 15, 2014. The Company’s Credit
Agreement with the Bank 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. Pursuant to the Amendment, the aggregate principal amount of
advances outstanding at any time under the Credit Agreement shall not exceed the Borrowing Base which is equal to
(i) 80% of Eligible Accounts Receivable (as defined in the Amendment) plus (ii) 40% of Eligible Inventory (as
defined in the Amendment). As of June 30, 2012, the Company had no outstanding borrowings and $108 thousand
in letters of credit outstanding. As of the date of issuance of the Annual Report, the Company had $2.1 million of
credit available pursuant to its amended credit agreement.
F-13
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT (continued)
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,
2014, the maturity date set under the Amendment. 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 Amendment
would be approximately 3.0% as of June 30, 2012.
The Amendment and Credit Agreement contain affirmative and negative covenants that, among other things, require
the Company to maintain a minimum level of tangible net worth of $21 million, not exceed a ratio of liabilities to
tangible net worth of 1.0 to 1.0 and achieve positive annual net income for the fiscal year ending June 30, 2013
(determined ninety days thereafter). As of June 30, 2012, we are in compliance with all applicable financial
covenants. The Amendment and Credit Agreement also contain 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.
NOTE 5 - INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
Year ended June 30,
2011
2012
2010
Current
Federal
State
Deferred
Federal
State
$
80
8
88
$
(1,161)
(65)
(1,226)
$
3,206
322
3,528
1,038
(3)
1,035
1,123
$
(305)
15
(290)
(1,516)
$
1,535
16
1,551
5,079
$
The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years
ended June 30, 2012, 2011 and 2010 is as follows:
Statutory rate
State income taxes, net
Meals and entertainment
Section 199 deduction (1)
Return to provision differences and other
Change in valuation allowance
Effective tax rate
2012
Year Ended June 30,
2011
2010
34.0%
0.0%
(0.5%)
0.0%
0.0%
33.5%
(78.5%)
(45.0%)
34.0%
1.0%
(0.4%)
(1.3%)
0.5%
33.8%
0.0%
33.8%
35.0%
1.3%
0.2%
(1.0%)
(0.3%)
35.2%
0.0%
35.2%
(1) Section 199 refers to Internal Revenue Service deduction for Income Attributable to Manufacturing Activities
F-14
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 5 - INCOME TAXES (continued)
For the fiscal years ended June 30, 2012, 2011 and 2010, state income taxes relate to the Texas Franchise Tax and
Georgia Income Tax. For the fiscal years ended June 30, 2012, 2011 and 2010, the Company evaluated the need for
a valuation allowance on its deferred tax asset balances. Based on that evaluation, the Company determined as of
June 30, 2011 and 2010 that it was more likely than not that the Company would realize these deferred tax assets
and as such that there was no valuation allowance provided. During the year ended June 30, 2012, the Company
recorded $2.0 million to establish a deferred tax valuation allowance to fully reserve net deferred tax assets. The
establishment of valuation allowances and development of projected annual effective tax rates requires significant
judgment and is impacted by various estimates. Both positive and negative evidence including losses over nine of
the past ten quarters, as well as the objectivity and verifiability of that evidence, is considered in determining the
appropriateness of recording a valuation allowance on deferred tax assets. Under generally accepted accounting
principles, the valuation allowance has been recorded to reduce our deferred asset to an amount that is more likely
than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred assets
related to net operating loss carryforwards and other tax attributes.
At June 30, 2012 and 2011, the significant components of deferred tax assets and liabilities are approximated as
follows (in thousands):
Deferred tax assets relating to:
Stock compensation
AMT and research and development credits
Deferred rent
Inventory
Professional fees
Accrued vacation
Accounts receivable allowance
Contribution carryovers
Net operating loss carryforwards
Total deferred tax assets
June 30,
2012
2011
$
583
397
145
119
72
21
9
3
1,215
2,564
$
413
317
132
124
50
21
9
-
556
1,622
Deferred tax liablities related to depreciation differences
Net deferred tax assets before valuation allowance
(603)
1,961
(671)
951
Valuation allowance
Net deferred tax assets
(1,961)
$
-
-
951
$
During the year ended June 30, 2012, the net deferred tax asset decreased $1.0 million. The decrease was due to the
recording of a deferred tax valuation allowance of $2.0 million offset by the generation of net operating loss
carryforwards and other tax credits.
During the years ended June 30, 2012 and 2011, the Company did not utilize any net operating loss carryforwards
for income tax purposes. In addition, during the years ended June 30, 2012, 2011 and 2010, $0.1 million, $1.0
million, and $1.1 million, respectively, of benefit was recorded to additional paid in capital which related to excess
tax deductions for stock-based compensation accounted for in accordance with the FASB’s guidance.
At June 30, 2012, the Company had net operating loss and various tax credit carryforwards which expire as follows
(dollars in millions):
Carryforwards
June 30, 2012
Expiration Date
Net operating loss
Research and development credit
Mininum tax credit
$
3.6
0.2
0.2
June 30, 2032
June 30, 2031
Indefinite
F-15
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 6 - EQUITY TRANSACTIONS
During the years ended June 30, 2012, 2011 and 2010, stock options to purchase shares of the Company’s common
stock were exercised as follows:
Year Ended June 30,
2011
2010
2012
Options Exercised
Proceeds (in thousands)
89,443
62,500
972,874
$
65
$
49
$
1,073
Average exercise price per share
$
0.73
$
0.78
$
1.10
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 494,748 shares are outstanding
as of June 30, 2012. Options granted generally vest over a period of three to four 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 600,683 shares are outstanding as of
June 30, 2012. 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.
As of June 30, 2012, 2011 and 2010, options available for grant under the Plans are as follow:
June 30,
2012
2011
2010
2010 Stock
Plan
1993 Stock
Plan
372,384
754,000
-
144,173
122,673
105,173
Total
516,557
876,673
105,173
F-16
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 7 - STOCK BASED COMPENSATION (continued)
The summary of activity for all stock options during the fiscal years ended June 30, 2012, 2011 and 2010 is
presented in the table below (in thousands):
Balance, June 30, 2009
Granted
Exercised
Forfeited or canceled
Balance, June 30, 2010
Granted
Exercised
Forfeited or canceled
Balance, June 30, 2011
Granted
Exercised
Forfeited or canceled
Options
Outstanding
1,398
416
(973)
(49)
792
243
(63)
(84)
888
320
(89)
(41)
Weighted
Average
Exercise
Price
$
$
$
$
1.17
7.12
1.10
5.57
$
$
$
$
4.21
4.55
0.78
5.46
$
$
$
$
4.43
3.97
0.73
4.23
(1)
(2)
Balance at June 30, 2012
1,078
$
4.60
(3)
Exercisable at June 30, 2012
556
$
4.62
(1) Excludes 30 thousand shares of Restricted Stock
(2) Excludes 0 thousand shares of Restricted Stock
(3) Excludes 17 thousand shares of Restricted Stock
The summary of activity for all restricted stock during the fiscal years ended June 30, 2012, 2011 and 2010 is
presented in the table below (in thousands):
Unvested at beginning of the year
Granted
Vested
Forfeited
Unvested at end of the year
2012
Year Ended June 30,
2011
2010
-
81
(64)
-
17
30
70
(100)
-
-
72
52
(84)
(10)
30
The weighted average fair value per share of restricted stock granted during the fiscal years ended June 30, 2012,
2011, and 2010 was $4.46, $4.65 and $9.81, respectively. The weighted average fair value per share of restricted
stock which vested during the fiscal years ended June 30, 2012, 2011 and 2010 was $4.47, $4.41 and $6.78,
respectively.
F-17
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 7 - STOCK BASED COMPENSATION (continued)
The following table summarizes information about stock options outstanding as of June 30, 2012 (in thousands
except per share amount):
Options Outstanding
Range of Exercise
Price
Outstanding
as of
June 30, 2012
$0.00 - $1.99
$2.00 - $3.99
$4.00 - $5.99
$6.00 - $7.99
$8.00- $10.00
50
495
322
1
210
1,078
Weighted
Average
Remaining
Life
(in Years)
0.90
5.12
5.34
4.67
4.91
Weighted
Average
Exercise
Price
$
$
$
$
$
$
0.84
3.37
4.48
6.60
8.58
4.60
The following table summarizes information about stock options exercisable as of June 30, 2012 (in thousands
except per share amount):
Options Exercisable
Range of Exercise
Price
Exercisable as
of
June 30, 2012
$0.00 - $1.99
$2.00 - $3.99
$4.00 - $5.99
$6.00 - $7.99
$8.00- $10.00
50
186
159
1
160
556
Weighted
Average
Remaining
Life
(in Years)
0.90
3.02
5.21
4.67
5.16
Weighted
Average
Exercise
Price
$
$
$
$
$
$
0.84
2.36
4.48
6.60
8.57
4.62
As of June 30, 2012, there was $657 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 2.38 years
F-18
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Operating Leases: The Company leases 190,489 square feet of space in Houston, Texas and Atlanta, Georgia. The
Company recognizes escalating rental payments that are quantifiable at the inception of the lease on a straight-line
basis over the lease term. The leases expire from April 2014 to April 2015 with options to renew the Company’s
leases for warehouses for 5 years and for office space 10 years. Rent expense for the fiscal years ended June 30,
2012, 2011 and 2010 was $1.4 million, $1.5 million and $1.2 million, respectively. Future minimum lease payments
under non-cancelable operating leases as of June 30, 2012 are as follows (in thousands):
Operating lease obligations
$
1,465
1,477
797
-
$
3,739
2013
Twelve Months Ending June 30,
2014
2016
2015
Total
As a result of the termination of the U.S. Government contract, the Company is attempting to buy-out or sublease
the Atlanta facility lease obligation. In August 2012, the Company agreed in principle to a deal with the Atlanta
facility landlord reducing its obligation under the lease for the 51,000 square foot facility by approximately 20,000
square feet effective September 1, 2012. The sublease agreement would reduce the operating lease obligations by
$87 thousand, $101 thousand and $59 thousand for the twelve months ending June 30, 2013, 2014 and 2015,
respectively.
Other: The Company is also involved in legal proceedings and litigation in the ordinary course of business. In the
opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s
consolidated financial position or consolidated results of operations.
NOTE 9 - EARNINGS PER SHARE
Earnings per share are measured at two levels: basic per share and diluted per share. Basic per share is computed by
dividing net income by the weighted average number of common shares outstanding during the period. Diluted per
share is computed by dividing net income by the weighted average number of common shares after considering the
additional dilution related to common stock options and restricted stock. In computing diluted earnings per share,
the outstanding common stock options are considered dilutive using the treasury stock method. Vested restricted
shares are included in basic common shares outstanding, and unvested restricted shares are included in the diluted
common shares outstanding if the effect is dilutive.
The following information is necessary to calculate earnings per share for the periods presented (in thousands,
except per share amount):
Year Ended June 30,
2012
2011
2010
Net income (loss), as reported
$
(3,621)
$
(2,975)
$
9,356
Weighted average common shares outstanding
Effect of dilutive stock options
Weighted average diluted common shares outstanding
15,109
-
15,109
14,944
-
14,944
14,176
776
14,952
Net income (loss) per common share
Basic
Diluted
$
$
(0.24)
(0.24)
$
$
(0.20)
(0.20)
$
$
0.66
0.63
Employee stock options excluded from computation of diluted
income per share amounts because their effect would
be anti-dilutive
831
550
241
F-19
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012, 2011 and 2010
NOTE 10 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following tables show quarterly financial information for the years ended June 30, 2012 and 2011. 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,
2011
$
$
$
$
$
5,743
3,924
(498)
(325)
(0.02)
15,065
December 31,
2011
$
6,212
$
4,065
$
34
$
28
$
-
15,404
March 31,
2012
$
$
$
$
$
5,291
3,766
(808)
(520)
(0.03)
15,111
June 30,
2012
$
$
$
$
$
4,541
3,491
(1,249)
(2,804)
(0.18)
15,185
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
F-20
Exhibit 21.1
Subsidiaries of the Registrant
Name
Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.)
Sharps e-Tools.com, Inc.
Sharps Safety, Inc.
Sharps Manufacturing, Inc.
Sharps Environmental Services, Inc. (dba Sharps Environmental
Services of Texas, Inc.)
Jurisdiction of Incorporation
Texas
Delaware
Texas
Delaware
Delaware
F-21
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No.
333-155638) of Sharps Compliance Corp. of our report dated August 30, 2012, with respect to the consolidated
financial statements of Sharps Compliance Corp. and subsidiaries as of June 30, 2012, and 2011, and for each of the
three fiscal years in the period ended June 30, 2012, and to our report dated August 30, 2012 on the effectiveness of
Sharps Compliance Corp. and subsidiaries’ internal control over financial reporting as of June 30, 2012, included in
this Annual Report on Form 10-K for the year ended June 30, 2012.
/s/ UHY LLP
Houston, Texas
August 30, 2012
F-22
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 302 OF THE
SARBANES-OXLEY ACT
I, David P. Tusa, certify that:
1.
I have reviewed this annual report on Form 10-K of Sharps Compliance Corp;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: August 30, 2012
By: /s/ DAVID P. TUSA
David P. Tusa
Chief Executive Officer and President
F-23
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER IN ACCORDANCE WITH SECTION 302 OF THE
SARBANES-OXLEY ACT
I, Diana P. Diaz, certify that:
1.
I have reviewed this annual report on Form 10-K of Sharps Compliance Corp;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of , and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: August 30, 2012
By: /s/ DIANA P. DIAZ
Diana P. Diaz
Vice President and Chief Financial Officer
F-24
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 906 OF
THE SARBANES-OXLEY ACT
In conjunction with the annual report of Sharps Compliance Corp. (the “Company”) on Form 10-K for the year
ended June 30, 2012, 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)
(2)
The Form 10-K report for the year ended June 30, 2012, filed with the Securities and
Exchange Commission on August 30, 2012, fully complies with the requirements of Section 13
(a) or 15(d) of the Securities and Exchange Act of 1934; and
The information contained in the Form 10-K report for the year ended June 30, 2012 fairly
presents, in all material respects, the financial condition and results of operations of Sharps
Compliance Corp.
Date: August 30, 2012
By: /s/ DAVID P. TUSA
David P. Tusa
Chief Executive Officer and President
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, 2012, 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, 2012, filed with the Securities and Exchange
Commission on August 30, 2012, 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, 2012 fairly
presents, in all material respects, the financial condition and results of operations of Sharps
Compliance Corp.
Date: August 30, 2012
By: /s/ DIANA P. DIAZ
Diana P. Diaz
Vice President and Chief Financial Officer
F-26
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SHARPS
SOLUTIONS:
Sharps fi rst-of-its-kind
Waste Conversion Process™
keeps medical waste and
unused medications out of
our landfi lls for a greener,
healthier planet.
758 million syringes
repurposed into a material
powering over 250 homes
per year.
Sharps Collected
320,000 lbs. of unused
medications, reducing
potential harm to citizens
and the earth.
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Headquartered in Houston, Texas, Sharps Compliance is a leading
full-service provider of solutions for the cost-eff ective management of
medical waste, used healthcare materials and unused dispensed
medications. Its strategy is to capture a large part of the estimated
$3.8 billion untapped market for its solutions by targeting the major
agencies that are interrelated with this medical waste stream, including
pharmaceutical manufacturers, home healthcare providers, retail pharmacies
and clinics, the U.S. government and the professional market which is
comprised of physicians, dentists and veterinary practices. As a fully
integrated medical waste management company providing customer
solutions and services, the Company’s solid business model, which
provides strong margins and signifi cant operating leverage, combined
with its early penetration into emerging markets, uniquely positions it
for strong future growth.
The Company’s fl agship product, the Sharps® Recovery System™ is a
comprehensive solution for the containment, transportation, treatment
and tracking of medical waste and used healthcare materials. The
Company’s TakeAway Environmental Return System™ is designed for
individual consumers, retail or mail-order pharmacies, communities
and facilities including assisted living, long-term care and correction
operations to facilitate the proper disposal of unused dispensed
medications. The Complete Needle Collection & Disposal System™ is a
safe, easy-to-use and cost-eff ective solution designed for self-injecting
consumers and includes the Company’s containment, packaging, return
shipping via the U.S. Postal Service, tracking and treatment.
The Company has partnered with Daniels Sharpsmart in a joint
marketing alliance to serve the entire U.S. medical waste market,
offering customers a blended product portfolio to effectively target
healthcare customers with multi-site and multi-size locations. The
alliance also enables a team effort for cross selling each company’s
capabilities where best suited.
2012 Billings by Market
[FY12 $21.8 million]
Home Healthcare
Retail
Professional
Pharmaceutical
U.S. Government
Others
Core Government
Assisted Living / Hospitality
31.5%
24.1%
13.9%
9.8%
7.7%
6.0%
5.1%
1.9%
www.sharpsinc.com.
CORPORATE AND
MANAGEMENT INFORMATION
David P. Tusa
Chief Executive Offi cer
and President
Claude A. Dance
Executive 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
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F. Gardner Parker
Chairman of the Board
Parker Investments
Houston, Texas
John W. Dalton (1)* (2) (3)
Private Investor
Houston, Texas
Parris H. Holmes (1) (2)*
Private Investor
San Antonio, Texas
Renee P. Tannenbaum, Pharm. D. (1) (3)
President
Myrtle Potter & Company, LLC
San Francisco, California
David P. Tusa
Chief Executive Offi cer and President
Houston, Texas
Philip C. Zerrillo, Ph.D. (2) (3) *
Full professor (practice)
Executive Director of
Postgraduate Professional Studies
Executive Director of
Case Writing Initiatives
Singapore Management University
(1) Member of Compensation Committee
(2) Member of Corporate Governance Committee
(3) Member of Audit Committee
* Committee Chairman
Ticker Symbol
NASDAQ: SMED
Annual Shareholder Meeting
November 15, 2012, at 10:00 AM CT
Hilton Houston Post Oak
Aesops Room
2001 Post Oak Blvd.
Houston, TX 77056
Transfer Agent
For services such as change of address,
replacement of lost certifi cates and changes
in registered ownership or for inquiries to
your account, contact:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Phone: 800.368.5948
www.rtco.com
Investor Relations
Investors, stockbrokers, security analysts
and others seeking information about
the Company should contact:
Diana P. Diaz, CPA
Vice President and Chief Financial Offi cer
Phone: 713.660.3547
ddiaz@sharpsinc.com
Deborah K. Pawlowski
Kei Advisors LLC
Investor Relations
Phone: 716.843.3908
dpawlowski@keiadvisors.com
Additional 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
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9220 Kirby Drive • Suite 500
Houston, Texas 77054
713-432-0300
www.sharpsinc.com
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