Sharps Compliance
Annual Report 2014

Plain-text annual report

SHARPS COMPLIANCE CORP FORM 10-K (Annual Report) Filed 08/27/14 for the Period Ending 06/30/14 Address Telephone CIK Symbol SIC Code 9220 KIRBY DRIVE STE 500 HOUSTON, TX 77054 713-432-0300 0000898770 SMED 4955 - Hazardous Waste Management Industry Waste Management Services Sector Fiscal Year Services 06/30 http://www.edgar-online.com © Copyright 2014, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K For the fiscal year ended June 30, 2014 OR For the transition period from to . Commission File Number: 001-34269 SHARPS COMPLIANCE CORP. (Exact name of registrant as specified in its charter) Registrant’s telephone number, including area code (713) 432-0300 Securities registered pursuant to Section 12(b) of the Act: 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:1) No  Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes (cid:1) No  Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No (cid:1) 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  No (cid:1) 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:1) 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): Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1) No  As of December 31, 2013, the aggregate market value of the Registrant’s Common Stock held by non-affiliates was approximately $60.3 million (based on the closing price of $ 4.73 on December 31, 2013 as reported by The NASDAQ Capital Market). The number of common shares outstanding of the Registrant was 15,290,073 as of August 25, 2014. DOCUMENTS INCORPORATED BY REFERENCE:     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (cid:1) (cid:1) (cid:1) (cid:1) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware 74-2657168 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 9220 Kirby Drive, Suite 500, Houston, Texas 77054 (Address of principal executive offices) (Zip Code) Title of Each Class Name of Each Exchange on Which Registered Common Shares, $0.01 Par Value The NASDAQ Capital Market Large accelerated filer (cid:1) Accelerated filer (cid:1) Non-accelerated filer (cid:1) Smaller reporting company  (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 20, 2014 are incorporated by reference into Part III.  SHARPS COMPLIANCE CORP. AND SUBSIDIARIES TABLE OF CONTENTS * ANNUAL REPORT ON FORM 10-K 2 PART I Item 1 Description of Business 3 Item 1A Risk Factors 11 Item 1B Unresolved Staff Comments 14 Item 2 Description of Property 14 Item 3 Legal Proceedings 15 Item 4 Mine Safety Disclosures 15 PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15 Item 6 Selected Financial Data 17 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A Quantitative and Qualitative Disclosures about Market Risk 26 Item 8 Financial Statements 26 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 26 Item 9A Controls and Procedures 26 Item 9B Other Information 27 PART III Item 10 Directors, Executive Officers and Corporate Governance 27 Item 11 Executive Compensation 28 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 28 Item 13 Certain Relationships and Related Transactions and Director Independence 28 Item 14 Principal Accountant Fees and Services 28 PART IV Item 15 Exhibits and Financial Statement Schedules 28 Signatures 32 *This Table of Contents is inserted for convenience of reference only and is not a part of this Report as filed. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This annual report on Form 10-K contains certain forward-looking statements and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words “anticipate”, “believe”, “expect”, “estimate”, “project” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors, including without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements. 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 national provider of comprehensive waste management services including medical, pharmaceutical and hazardous. Our solutions facilitate the proper collection, containment, transportation and treatment of numerous types of healthcare-related materials, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, or sharps, hazardous waste and unused consumer dispensed medications and over-the-counter drugs. We serve customers in multiple markets such as home health care, retail clinics and immunizing pharmacies, pharmaceutical manufacturers, professional offices (physicians, dentists and veterinarians), assisted living and long-term care facilities (assisted living, continuing care, long-term acute care, memory care and skilled nursing), government (federal, state and local), consumers, commercial and agriculture, as well as distributors to many of the aforementioned markets. We assist our customers in determining which of our solution offerings best fit their needs for the collection, containment, return transportation and treatment of medical waste, used healthcare materials, pharmaceutical waste, hazardous waste and unused dispensed medications. Our differentiated approach provides our customers the flexibility to return and properly treat 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”). For customers with facilities or locations that may generate larger quantities of waste, we integrate the route-based pick-up service into our complete offering. The benefits of this comprehensive offering include single point of contact, consolidated billing, integrated manifest and proof of destruction repository in addition to our cost savings. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and continued recurring revenue growth. We continue to take advantage of the many opportunities in all markets served as we educate the market place and as prospective customers become more aware of alternatives to traditional methods of disposal (i.e., route-based pick-up services). As a leading full-service national provider of comprehensive waste management services including medical, pharmaceutical and hazardous, our key markets include pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, retail pharmacies and clinics and the professional market which is comprised of physicians, dentists and veterinary practices. The Company’s flagship product, the Sharps ® Recovery System is a comprehensive solution for the containment, transportation, treatment and tracking of medical waste and used healthcare materials. 3 Table of Contents ITEM 1. DESCRIPTION OF BUSINESS 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 61 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 warehouse facility in Atlanta, Georgia. As a result of the termination of the U.S. Government contract, the Company executed 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. Effective February 1, 2013, the Company subleased the remaining portion of the Atlanta facility to a third party. We own and operate a fully-permitted treatment facility in Carthage, Texas that incorporates our processing and treatment operations. Approximately four 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). During fiscal year 2013, the Company, under an agreement with Daniels Sharpsmart, began supplementing its treatment facility operations by utilizing four Daniels Sharpsmart treatment facilities located across the country for the proper treatment of medical waste and used healthcare materials generated by certain of our customers. This arrangement not only reduces the Company’s return transportation costs associated with its Solutions but also provide back-up treatment facility capabilities in the event of disruption at the Company’s treatment facility in Carthage, Texas. 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 twenty gallons; USPS approved shipping box with pre-paid priority mail postage; absorbent material inside the container that can safely hold up to 150 milliliters of fluids; a bag for additional containment; and complete documentation and tracking manifest. The Sharps Recovery System is transported to our owned or contracted facilities 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. We introduced new systems this year to the Sharps Recovery System brand portfolio that are best suited for facilities with multiple treatment rooms. These new systems offer multiple sharps containers with a single return, pre-paid return box. 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, MedsTracer SM , 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. ComplianceTRAC SM : a more advanced web-based version of the Company’s compliance and training program. ComplianceTRAC is designed to improve worker safety while satisfying applicable Occupational Safety and Health Administration (“OSHA”) and other requirements for the end-user. The program includes employee training for Bloodborne pathogens, HHS-compliant HIPAA and Hazardous Communications. The online program also provides access to a database of over a million SDSs (MSDs), safety plans, regulatory information and facility self-audits. The program is designed to replace outdated hard copy manuals with an updated platform available 24/7. Route-Based Pick-Up Service: as a full-service waste management services company, we offer route-based medical and hazardous waste pick-up services to customers and prospects that have facilities or branches that generate larger quantities of medical or hazardous waste or where the route-based pick-up service is preferred. This blended service of mailback and pick-up provides cost-savings benefits by customizing the right solution with each location to reach the best outcome for the customer. 4 Table of Contents Universal Waste Shipback Systems: a jointly promoted program with Veolia Environmental Services using their RECYCLEPAK solutions for the collection, transportation and recycling of light bulbs, batteries and other mercury containing devices. The solution is marketed to existing and prospective customers as a complement to the Company’s line of medical waste and unused medication management solutions. Other Solutions : a wide variety of other solutions including SharpsTracer ® , Complete Needle ™ Collection and Disposal System, Pitch-It IV ™ Poles, Trip LesSystem ® , Sharps ® Pump and Asset Return System, Sharps Secure ® Needle Collection and Containment System ™ , Sharps ® MWMS ™ (a Medical Waste Management System (“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 and clinics, communities, assisted living and long-term care facilities, home healthcare companies, consumers, pharmaceutical manufacturers, government agencies, health care facilities, individual self-injectors and commercial organizations become more aware of alternatives to the traditional methods of management of medical sharps waste, used healthcare materials and unused dispensed medications. The Company’s growth strategies are focused on the Retail, Pharmaceutical, Professional, Assisted Living, Home Health Care and Environmental markets. The Company believes its growth opportunities are supported by: 5 Table of Contents • An increase in the number of used needles improperly disposed of outside the large healthcare setting and into the solid waste system to 7.8 billion each year (tripled volume over the past ten years) and an increase in the number of self-injectors in the country to 13.5 million over the same period; • 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 to whom we offer a lower cost alternative to the traditional pick-up service. The Company addresses this market from two directions: (i) field sales which focuses on larger dollar and nation-wide opportunities where we can integrate the route-based pick-up service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices; • An estimated 40% of the four billion dispensed medication prescriptions which go unused every year in the United States generating an estimated 200 million pounds of unused medication waste; • The pace of regulation of sharps and unused dispensed medications disposal which is gaining momentum at both the state and federal level - as of June 30, 2014, approximately 46 percent of U.S. citizens live in states that have enacted legislation or strict guidelines mandating the proper disposal of home generated used syringes while 67 percent live in states that have enacted or proposed legislation mandating the proper disposal of home generated dispensed unused medications. Further, since 2009, the federal government, nine states and several counties have introduced legislation requiring manufacturer responsibility for consumer generated unused medications. State regulatory agencies are also addressing this issue within the regulated industry. Multiple states now require healthcare providers to avoid sewer and trash disposal of non-hazardous unused medications within their facilities. States such as California, Washington and Minnesota have required assessment and proper treatment by a medical waste disposal company for years. However, other states such as Colorado and Florida are now requiring even small healthcare providers to segregate unused medications for proper disposal. In addition, states are beginning to more closely scrutinize generators returning through reverse distribution unused medications that are actually waste pharmaceuticals and should be disposed of as such. • The number of U.S. retail clinics is projected to increase significantly, expecting business to increase 20%-25% per year, driven by the increasing demand of newly insured patients under healthcare reform as well as patients looking for more convenient care. The two leading retail pharmacies in the country are emphasizing their efforts to grow their capability as a low cost provider of health care services for non-chronic conditions. The number of pharmacists nationwide trained to deliver vaccines has quadrupled since 2007. Vaccines offered in retail clinics include season flu programs as well as year round programs for pneumococcus, shingles, pediatric immunizations, HPV and international travel;  TERMINATED CONTRACT AND LEGAL SETTLEMENT On January 29, 2009, the Company entered into a five year contract with the United States Department of Veterans Affairs, National Acquisition Center (“VA NAC”), to provide its Sharps® MWMS™, a rapid-deployment solution designed to provide medical waste collection, storage and treatment in the event of natural disasters, pandemics, man-made disasters, or other national emergencies in support of the Centers for Disease Control, Division of Strategic National Stockpile. Sharps® MWMS™ also incorporated warehousing, inventory management, training, data and other services necessary to provide a comprehensive solution. Sharps performed under the contract through January 31, 2012. On June 30, 2014, the Company entered an agreement to settle its claims against the United States government and various agencies related to the January 2012 termination of the Company’s February 2009 contract with the Centers for Disease Control and Prevention (“CDC”). The settlement agreement resulted in a cash payment of $1.5 million, which was received by the Company in July 2014. COMPETITIVE STRENGTHS We believe our competitive strengths include the following: Leading full-service national provider of comprehensive and cost-effective waste management services including medical, pharmaceutical, and hazardous. We offer a full line of solutions and services that address the proper management of medical waste, used healthcare materials and patient dispensed unused or expired medications. We offer a blended product portfolio that includes both a mailback and route-based pick-up service to target prospective customers with multi-site and multi-sized locations that may include facilities that generate larger quantities of waste including medical, pharmaceutical and hazardous. This blended offering includes a single point of contact, consolidated billing, regulatory support and complete integration of our SharpsTracer ® system. Our proprietary SharpsTracer ® tracking and documentation systems provide customers a comprehensive electronic record of receipt and treatment of their waste to meet regulatory requirements. The Company’s mail or ship-back based services are generally offered at a significantly lower cost as compared to the traditional route-based pick-up services for small quantity generators since the Company utilizes the existing infrastructure of USPS or in some cases United Parcel Service (“UPS”) for return transportation. While competitors may attempt to replicate our comprehensive solution offerings, we believe the ability to offer such a comprehensive, value-added turnkey solution is a significant competitive advantage. We have only begun to offer this comprehensive solution over the past two years with the primary focus of our marketing efforts on educating the marketplace about us as an alternative to the historical provider of waste services including medical, pharmaceutical and hazardous. 6 Table of Contents • The changing demographics of the U.S. population - one out of five Americans will be 65 years or older by 2030, which will increase the need for cost-effective medical waste management solutions especially in the home healthcare and assisted living markets; • The change in delivery of healthcare (more health care being administered in an alternative site) as well as uncertainty created by the current state of healthcare; facts which are driving more healthcare providers to increase efficiencies and reduce costs; • Over the past two years, the Company has developed a network of medical and hazardous waste service providers including those with route based pick-up services which allows the Company to serve the entire U.S. medical and hazardous waste market. We offer clients a blended product portfolio to effectively target prospective customers with multi-site and multi-sized locations including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities – over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pick-up service are integrated into the offering; • 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 Medical/Professional TakeAway Recovery System and enhanced patient support programs with pharmaceutical manufacturers; and • The Company’s strong financial position with a cash balance of $13.7 million and no debt as of June 30, 2014. 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 four 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). During fiscal years 2013 and 2014, the Company, under an agreement with Daniels Sharpsmart, utilizes 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 has not only reduced the Company’s return transportation costs but also provides back-up treatment facility capabilities in the event of disruption at the Company’s treatment facility in Carthage, Texas. 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 track treatment volumes associated with pick-up services provided as part of our blended product portfolio using SharpsTracer ® . 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 pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care facilities, retail pharmacies and clinics and the professional market which is comprised of physicians, dentists and veterinary practices. We also serve federal, state and local government agencies, hospitality which includes hotels, commercial, industrial and agriculture. Our billings by market for the years ended June 30, 2014, 2013 and 2012 are below (as expressed in percentages of revenues): 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. 7 Table of Contents Year Ended June 30, 2014 2013 2012 BILLINGS BY MARKET: Home Health Care 27 % 32 % 31 % Retail 24 % 24 % 24 % Professional 20 % 18 % 14 % Pharmaceutical Manufacturer 14 % 11 % 10 % Assisted Living 6 % 7 % 6 % Environmental 3 % 1 % 1 % Core Government 2 % 3 % 2 % Other 4 % 4 % 4 % U.S. Government Contract 0 % 0 % 8 % 100 % 100 % 100 % 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 addition to state restrictions on disposal of home generated sharps by consumers, several counties have passed ordinances requiring businesses that sell syringes to the public, such as retail pharmacies and veterinary clinics to take back those syringes, once used, in regulatory-compliant sharps containers at no charge to the consumer. 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. Further, since 2009, the federal government, nine states and several counties have introduced legislation requiring manufacturer responsibility for consumer generated unused medications. State regulatory agencies are also addressing this issue within the regulated industry. Multiple states now require healthcare providers to avoid sewer and trash disposal of non-hazardous unused medications within their facilities. States such as California, Washington and Minnesota have required assessment and proper treatment by a medical waste disposal company for years. However, other states such as Colorado and Florida are now requiring even small healthcare providers to segregate unused medications for proper disposal. In addition, states are beginning to more closely scrutinize generators returning through reverse distribution unused medications that are actually waste pharmaceuticals and should be disposed of as such. 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 discovering new sustainable initiatives that mitigate the effects of potentially hazardous waste on the environment. Our patented Waste Conversion Process ™ repurposed regulated medical waste and unused medications into new resources used in industrial applications such as the generation of electricity or recycled plastics used in the industrial sector. Our Universal Waste Shipback Program recycles the materials in light bulbs, batteries, and other mercury containing devices for use in new applications. In addition, 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, unused dispensed medications, light bulbs, batteries and other mercury containing devices 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 ten plus years with the Company has over 20 years of business and public company experience in multiple industries and in companies with revenues up to $500 million. Mr. Brandon L. Beaver, Senior Vice President of Sales, has broad health care sales and sales management experience with the Company and at a variety of firms including AIMS/Allied Care, a third party administrator and managed care company. Ms. Diana P. 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 20 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. 8 Table of Contents 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, our hazardous waste solutions, our universal waste solutions 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. Over the past two years, the Company has developed a network of medical and hazardous waste service providers including those with route based pick-up services which allows the Company to serve the entire U.S. medical and hazardous waste market. We offer clients a blended product portfolio to effectively target current and prospective customers with multi-site and multi-sized locations including those that generate larger quantities of medical and hazardous waste. The offering includes a single point of contact, consolidated billing, regulatory support and complete integration of our Sharps Tracer System. The Company believes the comprehensive offering will continue to assist the Company in landing larger opportunities whereby the customer has both large and small quantity facilities generating medical waste, used healthcare materials and hazardous waste. We are positive about anticipated growth opportunities in the Retail market. Regarding the future of this market, a recently published reported by Accenture cites that the number of U.S. retail clinics are projected to increase significantly, expecting business to increase 20%-25% per year, driven by the increasing demand of newly insured patients under healthcare reform as well as patients looking for more convenient care. The two leading retail pharmacies in the country are emphasizing their efforts to grow their capability as a low cost provider of health care services for non-chronic conditions. Given our strong market share, we believe we are very well-positioned to capitalize on this trend which would, in-turn, drive demand for our cost-effective solutions. Since June 30, 2011, the Company experienced growth of over twelve times or $3.4 million in the pharmaceutical market. We continue to see interest in our patient support program solution offering among pharmaceutical manufacturers as it relates to self-injectable medications especially related to new drug launches. 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. During the second half of calendar year 2014, the Company will launch two new patient support programs for new drugs. In addition, during calendar year 2015 and through the first half of calendar 2016, Sharps expects to launch four additional patient support programs for new drug therapies. We believe the Company is the leader in providing solutions of this type to this market. Enhance sales and marketing efforts. Field Sales – The Company maintains a field sales team that focuses on larger dollar and nation-wide opportunities in most of the markets served. The field sales team is able to address much larger opportunities as a result of its network of medical and hazardous waste service providers which allows the Company to integrate the route-based pick-up service along with our mailback solutions to create a comprehensive waste management offering. We have seen success with this approach in fiscal year 2013 and 2014 and believe the comprehensive offering capabilities will continue to accelerate revenue growth of the Company. Web and Inside Sales - Through targeted telemarketing initiatives (inside sales), e-commerce driven website and web-based promotional activities, we believe we can drive significant additional growth as we increase awareness of the Company’s innovative solution offerings. 9 Table of Contents 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 waste treatment including medical, pharmaceutical, and hazardous. 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 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 Medical/Professional TakeAway Recovery System™, the Sharps ® MWMS™ and ComplianceTRAC SM . 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, pharmaceutical waste, hazardous waste 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. 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 fiscal year ended June 30, 2014, one customer represented approximately 20% of revenue. This customer represented approximately 13%, or $599 thousand, of the total accounts receivable balance at June 30, 2014. For the fiscal year ended June 30, 2013, one customer represented approximately 22% of revenue. This customer represented approximately 25% or $638 thousand, of the total accounts receivable balance at June 30, 2013. For the fiscal year ended June 30, 2012, two customers represented approximately 30% of revenues. One of the customers was a major U.S. government agency which terminated January 31, 2012. 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. We also have 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 Herman Packaging 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. 10 Table of Contents 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, ComplianceTRAC SM , 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, US 8,100,989, US 8,268,073 and US 4,440,534), our Sharps Secure ® Needle Collection and Containment System™ (patent numbers US 8,162,139 and US 8,235,883), our unique design features related to the TakeAway Environmental Return System™ drop-off boxes (patent number US 8,324,443) and our Complete Needle™ Collection & Disposal System (patent number US 4,463,106). We have a patent pending on 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. With the addition of the route-based pick-up services offered through a network of medical and hazardous waste services providers, the Company believes it is better positioned, with its comprehensive medical waste management offering, to compete with Stericycle. 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, comprehensive medical waste management service offerings, first mover advantages, excellent industry reputation, significant history of market and customer success, quality solutions and products, as well as our capabilities as a vertically integrated producer of products and services, provides significant differentiation in the current competitive market. GOVERNMENT REGULATION Sharps is subject to extensive federal, state, and/or local laws, rules and regulations. We are required to obtain permits, authorizations, approvals, certificates and other types of governmental permission from the EPA, the State of Texas and the local governments in Carthage, Texas with respect to our facilities. Such laws, rules and regulations have been established to promote occupational safety and health standards and certain standards have been established in connection with the handling, transportation and disposal of certain types of medical and solid wastes, including transported medical waste. Our estimated annual costs of complying with these laws, regulations and guidelines is currently less than $200,000 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 modified the emission limits and monitoring procedures required to operate an incineration facility. These new regulations and the recent receipt of a Title V permit required additional emissions-related monitoring equipment and compliance. Such changes required us to incur capital expenditures, which have been reflected in cash flows from investing activities in the Company’s consolidated statement of cash flows, in order to meet the requirements of the new regulations. We may be unable to manage our growth effectively. We continue to experience core revenue growth for fiscal year 2014, as we saw the benefits of our marketing activities in all of our target markets. Revenue increased more than 23% to $26.6 million for the fiscal year ended June 30, 2014 driven by targeted telemarketing initiatives and promotional activities in the professional market, continued roll-out of new patient support programs in the pharmaceutical market, increases in the retail market due primarily to flu shot related business and marketing initiatives around third party treatment services in the environmental market. The increase in revenue and execution of our growth strategies 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. 11 Table of Contents ITEM 1A. RISK FACTORS 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, Senior Vice President of Sales, Vice President and CFO, Vice President of Operations and Vice President of Quality Assurance. We believe that the continued success of the business is largely dependent upon the continued employment of the senior management team and has, therefore, (i) entered into individual employment arrangements with key personnel and (ii) 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, 2014, one customer represented approximately 20% of revenues. This customer represented approximately 13%, or $599 thousand, of the total accounts receivable balance at June 30, 2014. To the extent 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 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. 12 Table of Contents 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 $200,000 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 modified the emission limits and monitoring procedures required to operate an incineration facility. These new regulations and the recent receipt of a Title V permit required additional emissions-related monitoring and compliance. Such changes required us to incur capital expenditures, which have been reflected in cash flows from investing activities in the Company’s consolidated statement of cash flows, in order to meet the requirements of the new regulations. 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). 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 years 2013 and 2014, the Company, under an agreement with Daniels Sharpsmart, utilized 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 has not only reduced the Company’s return transportation costs but also provides 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. 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. 13 Table of Contents 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. In the year subsequent to the contract’s termination, our Company-wide revenues experienced a decrease compared to prior periods. Although the Company is attempting to secure additional U.S. Government contracts, 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 65,000 shares. It may be difficult for to sell shares in the public market at any given time at prevailing prices, and the price of our common stock may, therefore, be volatile. As of the date of this report, we do not have any unresolved staff comments. Sharps leases 170,489 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 executed 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. In February 2013, the Company subleased the remaining portion of the Atlanta facility effective February 1, 2013. The lease for warehouse space in Houston, Texas was extended in June 2014. The Company’s leases expire from January 2015 to August 2020 with options to renew the leases for warehouses for 5 years and for office space for 10 years. 14 Table of Contents ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 2. DESCRIPTION OF PROPERTY We own and operate a fully-permitted 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 100 tons per day of medical, pharmaceutical and other healthcare related waste. The incinerator at the facility is currently permitted to treat 40 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 eight tons per day of medical waste. None. Not applicable. PART II 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 65,000 shares traded per month. The table below sets forth the high and low closing prices of the Company’s common stock on the NASDAQ (July 1, 2012 through August 25, 2014) for each quarter within the last two fiscal years. Stockholders : At August 25, 2014, there were 15,290,073 shares of common stock held by approximately 274 holders of record. The last reported sale of the common stock on August 25, 2014 was $4.44 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. 15 Table of Contents ITEM 3. LEGAL PROCEEDINGS ITEM 4. MINE SAFETY DISCLOSURES ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Common Stock High Low Fiscal Year Ended June 30, 2013 First Quarter $ 3.74 $ 2.50 Second Quarter $ 3.35 $ 2.26 Third Quarter $ 3.00 $ 2.10 Fourth Quarter $ 3.18 $ 2.60 Fiscal Year Ending June 30, 2014 First Quarter $ 3.07 $ 2.57 Second Quarter $ 5.10 $ 2.99 Third Quarter $ 5.36 $ 4.19 Fourth Quarter $ 4.70 $ 3.89 Fiscal Year Ending June 30, 2015 First Quarter (August 25, 2014) $ 4.78 $ 4.32 Issuer Purchases of Equity Securities: On January 7, 2013, the Company announced that its Board of Directors approved a stock repurchase program effective January 3, 2013, authorizing the Company to repurchase in the aggregate up to $3 million of its outstanding common stock over a two-year period. The shares would be purchased from time to time on the open market or in privately negotiated transactions, at the Company's discretion, in each case, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, subject to market and business conditions, applicable legal requirements, explicit black-out dates and other factors. The purchases will be funded using the Company's available cash balances and cash generated from operations. The program does not obligate the Company to acquire any particular amount of common stock and may be modified, suspended or terminated at any time at the Company's discretion in accordance with Rule 10b-18. During the three months ended June 30, 2014, Sharps repurchased no shares. As of June 30, 2014, approximately $2.3 million remained of our $3.0 million repurchase program. 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 year 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. *The Corporate Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing. Securities Authorized for Issuance under Equity Compensation Plans: The following equity compensation plan information is provided as of June 30, 2014: Table of Contents Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (a) (b) (c) 2010 Stock Plan as approved by shareholders (1) (2) 589,999 $ 3.82 139,267 1993 Stock Plan as approved by shareholders (3) 364,914 4.82 269,494 Total 959,913 4.20 408,761 Notes: (1) Represents stock options issued under the Sharps Compliance Corp. 2010 Stock Plan. The 2010 Stock Plan which was approved by shareholders in November 2010 is intended to replace the 1993 Stock Plan. (2) Number of securities to be issued and weighted average exercise price include the effect of 15,499 shares of restricted stock issued to the Board of Directors. (3) Represents stock options issued under the 1993 Stock Plan. 16  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): 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.” 17 Table of Contents ITEM 6. SELECTED FINANCIAL DATA For the Year Ended June 30, 2014 2013 2012 2011 2010 Revenues $ 26,570 $ 21,530 $ 21,787 $ 19,395 $ 39,156 Operating Income (Loss) $ 965 $ (2,709 ) $ (2,521 ) $ (4,536 ) $ 14,398 Net Income (Loss) $ 956 $ (2,712 ) $ (3,621 ) $ (2,975 ) $ 9,356 Net Income (Loss) per share: Basic $ 0.06 $ (0.18 ) $ (0.24 ) $ (0.20 ) $ 0.66 Diluted $ 0.06 $ (0.18 ) $ (0.24 ) $ (0.20 ) $ 0.63 Total Assets $ 26,461 $ 25,532 $ 27,638 $ 30,598 $ 31,632 Total Debt $ - $ - $ - $ - $ - Cash and Cash Equivalents $ 13,717 $ 15,503 $ 17,498 $ 18,280 $ 18,068 Working Capital $ 17,888 $ 16,643 $ 18,607 $ 20,226 $ 21,617 Total Stockholders' Equity $ 21,904 $ 21,070 $ 23,180 $ 25,865 $ 26,941 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2014, 2013 and 2012, 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 ): YEAR ENDED JUNE 30, 2014 AS COMPARED TO YEAR ENDED JUNE 30, 2013 Total revenues for the fiscal year ended June 30, 2014 of $26.6 million increased by $5.0 million, or 23.4%, from the total revenues for the fiscal year ended June 30, 2013 of $21.5 million. Billings by market are as follows (in thousands): *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 consolidated 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. 18 Table of Contents Year Ended June 30, 2014 % 2013 % 2012 % Revenues $ 26,570 100.0 % $ 21,530 100.0 % $ 21,787 100.0 % Cost of revenues 17,581 66.2 % 15,183 70.5 % 15,246 70.0 % Gross profit 8,989 33.8 % 6,347 29.5 % 6,541 30.0 % SG&A expense 9,100 34.2 % 8,619 40.0 % 8,609 39.5 % Legal settlement (1,538 ) (5.8 %) - 0.0 % - 0.0 % Depreciation and amortization 462 1.7 % 437 2.0 % 453 2.1 % Operating income (loss) 965 3.6 % (2,709 ) (12.6 %) (2,521 ) (11.6 %) Other income 24 0.1 % 12 0.1 % 23 0.1 % Income (loss) before income taxes 989 (2,697 ) (2,498 ) Income tax expense 33 0.1 % 15 0.1 % 1,123 5.2 % Net income (loss) $ 956 3.6 % $ (2,712 ) (12.6 %) $ (3,621 ) (16.6 %) Year Ended June 30, 2014 2013 Variance (Unaudited) (Unaudited) (Unaudited) BILLINGS BY MARKET: Home Health Care $ 7,251 $ 6,721 $ 530 Retail 6,406 5,041 1,365 Professional 5,311 3,863 1,448 Pharmaceutical Manufacturer 3,735 2,413 1,322 Assisted Living 1,713 1,576 137 Environmental 755 182 573 Core Government 495 732 (237 ) Other 941 755 186 Subtotal 26,607 21,283 5,324 GAAP Adjustment * (37 ) 247 (284 ) Revenue Reported $ 26,570 $ 21,530 $ 5,040 The increase in revenues is primarily attributable to increased billings in the Professional ($1.4 million), Retail ($1.4 million), Pharmaceutical Manufacturer ($1.3 million), Environmental ($0.6 million) and Home Health Care ($0.5 million) markets. The increase in billings was partially offset by decreased billings in the Core Government ($0.2 million) market. The increase in Professional market billings is a result of continued targeted telemarketing initiatives and promotional activities to educate doctors, dentists, veterinarians and other healthcare professionals about the significant cost advantage and convenience of the Company’s Sharps ® Recovery mailback system when compared with the traditional pick-up service for the small quantity generator sector. The increase in Retail market billings is due to increases in flu shot related business. Retail pharmacies are increasing the amount and variety of healthcare services they provide and this segment represents a long-term growth driver and key competitive advantage, given Sharps’ estimated 75% market share in this segment. The increase in Pharmaceutical Manufacturer market billings is due to the continued rollout, including resupply orders, of several patient support programs. The programs include the direct fulfillment of the Sharps ® Recovery System to the pharmaceutical manufacturer’s program participants which provides the proper containment, return, and treatment of the needles or injection devices utilized in therapy. The increase in Home Health Care market billings is due to the timing of distributor purchases. The increase in Environmental market billings was driven by focused marketing initiatives around third party treatment services which are starting to gain traction. The decrease in Core Government billings was due to distributor sales of $0.2 million in the prior year to a major U.S. agency to facilitate the launch of our solutions in selected military bases. Cost of revenues for the year ended June 30, 2014 of $17.6 million was 66.2% of revenues. Cost of revenues for the year ended June 30, 2013 of $15.2 million was 70.5% of revenue. The higher gross margin for the year ended June 30, 2014 of 33.8% (versus 29.5% for the year ended June 30, 2013) was due to the leverage gained from higher revenue. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2014 and 2013 were $9.1 million and $8.6 million, respectively. SG&A for fiscal year 2014 was negatively impacted by legal expenses of $0.3 million related to our claim to the CDC related to the termination of the government contract and severance costs of $0.1 million for a former officer of the Company. SG&A for fiscal year 2013 was negatively impacted by severance costs of $0.2 million for a former officer of the Company. Excluding these unusual items, SG&A expense increased $0.3 million due to increased sales and marketing-related spending. The Company generated operating income of $1.0 million for the year ended June 30, 2014 compared to an operating loss of $2.7 million for the year ended June 30, 2013. Operating income for the year ended June 30, 2014 was positively impacted by a $1.5 million legal settlement related to the Company’s claims against the U.S. government related to a contract termination. In addition to the legal settlement, the improvement in operating income resulted from higher billings along with improved gross margin as a result of greater operating leverage gained from higher revenue (discussed above). The Company generated income before income taxes of $1.0 million for year ended June 30, 2014 versus a loss before income taxes of $2.7 million for the year ended June 30, 2013. Income before income taxes was positively impacted by the $1.5 million legal settlement and other improvement in operating income (discussed above). The Company’s effective tax rate for the year ended June 30, 2014 was 3.3% reflecting primarily estimated state income taxes. The effective tax rate for the year ended June 30, 2013 was (0.6%). The Company’s net deferred tax assets have been fully reserved by a tax valuation allowance. The Company’s tax expense associated with taxable gains during the year ended June 30, 2014 and tax benefit associated with taxable losses during the year ended June 30, 2013, was offset by a deferred tax valuation allowance. The Company generated net income of $1.0 million for year ended June 30, 2014 compared to a net loss of $2.7 million for the year ended June 30, 2013. Net income was positively impacted by the $1.5 million legal settlement and other improvement in operating income (discussed above). The Company reported diluted income per share of $0.06 for the year ended June 30, 2014 versus diluted loss per share of ($0.18) for year ended June 30, 2013. Diluted income per share was positively impacted by the $1.5 million legal settlement and other improvement in net income (discussed above). 19 Table of Contents YEAR ENDED JUNE 30, 2013 AS COMPARED TO YEAR ENDED JUNE 30, 2012 Total revenues for the fiscal year ended June 30, 2013 of $21.5 million decreased by $0.3 million, or 1.2%, from the total revenues for the fiscal year ended June 30, 2012 of $21.8 million. Billings by market are as follows (in thousands): *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 consolidated 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 ($1.7 million) and Retail ($0.2 million) markets. These decreases in billings were partially offset by increased billings in the Professional ($0.8 million), Core Government ($0.3 million) and Pharmaceutical ($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 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 decrease in Retail billings was primarily due to the timing of customer orders and a new program launch in the prior-year period of the TakeAway Environmental Return System™ solutions. These decreases in the Retail market were partially offset by higher sales of the Complete Needle Collection & Disposal System™ in the current fiscal year. The increase in the Professional market billings was a direct result of the Company’s targeted telemarketing initiatives and promotional activities to inform doctors, dentists and veterinarians of the significant cost advantage and convenience of the Company’s Sharps ® Recovery System when compared with the traditional pick-up service in the small quantity generator sector. The Professional market was also positively impacted by JMA related business during the current year. The increase in the Core Government market billings reflects distributor sales to a major U.S. agency to facilitate the launch of our solutions in selected military bases. The increase in the Pharmaceutical market billings is due to the timing of customer orders including resupply orders from several 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. Cost of revenues for the year ended June 30, 2013 of $15.2 million was 70.5% of revenues. Cost of revenues for the year ended June 30, 2012 of $15.2 million was 70.0% of revenue. The lower gross margin for the year ended June 30, 2013 of 29.5% (versus 30.0% for the year ended June 30, 2012) was due to ongoing facility costs of $0.3 million, or 120 basis points, associated with the maintenance portion of the U.S. government contract that was terminated as of January 31, 2012. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2013 and 2012 were $8.6 million. SG&A for fiscal year 2013 was negatively impacted by severance costs for a former officer of the Company of $0.2 million. 20 Table of Contents Year Ended June 30, 2013 2012 Variance (Unaudited) (Unaudited) (Unaudited) BILLINGS BY MARKET: Home Health Care $ 6,721 $ 6,856 $ (135 ) Retail 5,041 5,259 (218 ) Professional 3,863 3,019 844 Pharmaceutical Manufacturer 2,413 2,129 284 Assisted Living 1,576 1,307 269 Environmental 182 132 50 Core Government 732 419 313 Other 755 982 (227 ) U.S. Government Contract - 1,685 (1,685 ) Subtotal 21,283 21,788 (505 ) GAAP Adjustment * 247 (1 ) 248 Revenue Reported $ 21,530 $ 21,787 $ (257 ) The Company generated an operating loss of $2.7 million for the year ended June 30, 2013 compared to an operating loss of $2.5 million for the year ended June 30, 2012. The increase in operating loss is a result of lower billings in fiscal year 2013 (discussed above). The Company generated a loss before income taxes of $2.7 million for year ended June 30, 2013 versus a loss before income taxes of $2.5 million for the year ended June 30, 2012. The increase in loss before income taxes is a result of a higher operating loss in fiscal year 2013 (discussed above). The Company’s effective tax rate for the year ended June 30, 2013 was (0.6%) reflecting estimated state income taxes compared to 45.0% for the year ended June 30, 2012. 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 Company’s tax benefit associated with taxable losses during the year ended June 30, 2013 was offset by a deferred tax valuation allowance of $0.9 million. Excluding the impact of the valuation allowance, the effective tax rate benefit was relatively flat at 33.6% for the year ended June 30, 2013 compared to 33.5% for the year ended June 30, 2012. The Company generated a net loss of $2.7 million for year ended June 30, 2013 compared to a net loss of $3.6 million for the year ended June 30, 2012. The improvement in net loss was primarily due to the decrease in the deferred tax valuation allowance recorded in fiscal year 2013 compared with fiscal year 2012 (discussed above). The Company reported diluted loss per share of ($0.18) for the year ended June 30, 2013 versus diluted loss per share of ($0.24) for year ended June 30, 2012. The improvement in diluted loss per share is a result of a lower net loss (discussed above). 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 and long-term care facilities, home healthcare companies, consumers, pharmaceutical manufacturers, government agencies, health care facilities, individual self-injectors and commercial organizations become more aware of alternatives to the traditional methods of management of medical sharps waste, used healthcare materials and unused dispensed medications. The Company’s growth strategies are focused on the Retail, Pharmaceutical, Professional, Assisted Living, Home Health Care and Environmental markets. The Company believes its growth opportunities are supported by: 21 Table of Contents • An increase in the number of used needles improperly disposed of outside the large healthcare setting and into the solid waste system to 7.8 billion each year (tripled volume over the past ten years) and an increase in the number of self-injectors in the country to 13.5 million over the same period; • 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 to whom we offer a lower cost alternative to the traditional pick-up service. The Company addresses this market from two directions: (i) field sales which focuses on larger dollar and nation-wide opportunities where we can integrate the route-based pick-up service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices; • An estimated 40% of the four billion dispensed medication prescriptions which go unused every year in the United States generating an estimated 200 million pounds of unused medication waste; • The pace of regulation of sharps and unused dispensed medications disposal which is gaining momentum at both the state and federal level - as of June 30, 2014, approximately 46 percent of U.S. citizens live in states that have enacted legislation or strict guidelines mandating the proper disposal of home generated used syringes while 67 percent live in states that have enacted or proposed legislation mandating the proper disposal of home generated dispensed unused medications. Further, since 2009, the federal government, nine states and several counties have introduced legislation requiring manufacturer responsibility for consumer generated unused medications. State regulatory agencies are also addressing this issue within the regulated industry. Multiple states now require healthcare providers to avoid sewer and trash disposal of non-hazardous unused medications within their facilities. States such as California, Washington and Minnesota have required assessment and proper treatment by a medical waste disposal company for years. However, other states such as Colorado and Florida are now requiring even small healthcare providers to segregate unused medications for proper disposal. In addition, states are beginning to more closely scrutinize generators returning through reverse distribution unused medications that are actually waste pharmaceuticals and should be disposed of as such;  TERMINATED CONTRACT AND LEGAL SETTLEMENT On January 29, 2009, the Company entered into a five year contract with the United States Department of Veterans Affairs, National Acquisition Center (“VA NAC”), to provide its Sharps® MWMS™, a rapid-deployment solution designed to provide medical waste collection, storage and treatment in the event of natural disasters, pandemics, man-made disasters, or other national emergencies in support of the Centers for Disease Control, Division of Strategic National Stockpile. Sharps® MWMS™ also incorporated warehousing, inventory management, training, data and other services necessary to provide a comprehensive solution. Sharps performed under the contract through January 31, 2012. On June 30, 2014, the Company entered an agreement to settle its claims against the United States government and various agencies related to the January 2012 termination of the Company’s February 2009 contract with the Centers for Disease Control and Prevention (“CDC”). The settlement agreement resulted in a cash payment of $1.5 million which was received by the Company in July 2014. 22 Table of Contents • The number of U.S. retail clinics is projected to increase significantly, expecting business to increase 20%-25% per year, driven by the increasing demand of newly insured patients under healthcare reform as well as patients looking for more convenient care. The two leading retail pharmacies in the country are emphasizing their efforts to grow their capability as a low cost provider of health care services for non-chronic conditions. The number of pharmacists nationwide trained to deliver vaccines has quadrupled since 2007. Vaccines offered in retail clinics include season flu programs as well as year round programs for pneumococcus, shingles, pediatric immunizations, HPV and international travel; • The changing demographics of the U.S. population - one out of five Americans will be 65 years or older by 2030, which will increase the need for cost-effective medical waste management solutions especially in the home healthcare and assisted living markets; • The change in delivery of healthcare (more health care being administered in an alternate site) as well as uncertainty created by the current state of healthcare; facts which are driving more healthcare providers to increase efficiencies and reduce costs; • Over the past two years, the Company has developed a network of medical and hazardous waste service providers including those with route based pick-up services which allows us to serve the entire U.S. medical and hazardous waste market. We offer clients a blended product portfolio to effectively target prospective customers with multi-site and multi-sized locations including those that generate larger quantities of medical waste. The network has had a significant positive impact on our pipeline of sales opportunities – over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pick-up service are integrated into the offering; • 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 Medical/Professional TakeAway Recovery System and enhanced patient support programs with pharmaceutical manufacturers; and • The Company’s strong financial position with a cash balance of $13.7 million and no debt as of June 30, 2014. LIQUIDITY AND CAPITAL RESOURCES Cash Flow Cash and cash equivalents decreased by $1.8 million to $13.7 million at June 30, 2014 from $15.5 million at June 30, 2013. The decrease in cash and cash equivalents is primarily due to the timing of collections from orders related to billings in June 2014, repurchased shares of $0.6 million, and capital expenditures and additions to intangible assets of $0.6 million (discussed below). Accounts receivable increased by $2.1 million to $4.7 million at June 30, 2014 from $2.6 million at June 30, 2013. The increase is due to timing of billings and cash collections. Inventory decreased by $0.3 million to $1.3 million at June 30, 2014 from $1.6 million at June 30, 2013. The decrease in inventory is due to an inventory write-down of $156 thousand and the timing of sales and adjustment of inventory levels to facilitate customer orders. Working capital increased $1.3 million to $17.9 million at June 30, 2014 from $16.6 million at June 30, 2013. Working capital was positively impacted by a $1.5 million legal settlement receivable at June 30, 2014 related to the Company’s claims against the U.S. government related to a contract termination which was collected in July 2014. The remaining change was due to reductions in cash and cash equivalents and inventory offset by an increase to accounts receivable (discussed above). Property, plant and equipment, net decreased by $0.5 million to $3.9 million at June 30, 2014 from $4.4 million at June 30, 2013. The decrease in property and equipment is related to depreciation expense of $1.1 million, partially offset by capital expenditures of $0.5 million. The capital expenditures are attributable primarily to treatment facility improvements of $260 thousand, (ii) computer and office equipment and custom software programming of $30 thousand and (iii) manufacturing and assembly equipment including molds, dies and printing plates of $178 thousand. Stockholders’ equity increased by $0.8 million to $21.9 million at June 30, 2014 from $21.1 million at June 30, 2013. Stockholders’ equity was positively impacted by net income of $1.0 million that includes the $1.5 million legal settlement discussed above. The remaining change was primarily attributable to stock repurchases of $0.6 million offset in part by stock-based compensation of $0.4 million. Off-Balance Sheet Arrangements The Company was not a party to any off-balance sheet transactions as defined in Item 303 of Regulation S-K for the years ended June 30, 2014 and 2013. Contractual Obligations 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, 2014 are as follows (in thousands): 23 Table of Contents Twelve Months Ending June 30, 2015 2016 2017 2018 2019 Thereafter Operating lease obligations $ 735 $ 526 $ 631 $ 644 $ 659 $ 788 Credit Facility On January 28, 2014, the Company entered into a credit agreement with a commercial bank (“Credit Agreement”). The Credit Agreement, which replaces the prior credit agreement which was executed effective April 30, 2013 with another commercial bank (“Prior Credit Agreement”), provides for a two-year, $3.0 million line of credit facility, the proceeds of which may be utilized for working capital, letters of credit (up to $500,000) and general corporate purposes. Indebtedness under the Credit Agreement is secured by the Company’s accounts receivable and inventory with advances outstanding at any time limited to a Borrowing Base (as defined in the Credit Agreement) equal to 80% of eligible accounts receivable plus 50% of eligible inventory. Borrowings bear interest at WSJ Prime, which we estimate to be approximately 3.25% as of June 30, 2014. The Company will pay a fee of 0.25% per annum on the unused amount of the line of credit. As of June 30, 2014, the Company had no outstanding borrowings, other than $335 thousand in letters of credit, which leaves $2.7 million of credit available. The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a minimum level of tangible net worth of $10.5 million and minimum liquidity of $5.0 million. The Company is in compliance with all the financial covenants as of June 30, 2014. The Credit Agreement, which expires on January 28, 2016, also contains customary events of default which, if uncured, may terminate the Credit Agreement and require immediate repayment of all indebtedness to the lenders. The Prior Credit Agreement, which was effective through January 28, 2014, provided for a cash-collateralized $200,000 line of credit facility with a maturity date of July 15, 2015. No amounts related to the Prior Credit Agreement were outstanding as of June 30, 2014 other than letters of credit of approximately $110 thousand, which are in the process of being released. Management believes that the Company’s current cash resources (cash on hand) will be sufficient to fund operations for the twelve months ending June 30, 2015. Treatment Facility The Company’s treatment facility in Carthage, Texas is currently permitted to process 100 tons per day. The incinerator at the facility is currently permitted to treat 40 tons per day of municipal solid waste with 10% of this amount identified as applicable to healthcare facility generated medical waste. Approximately five years ago, the Company supplemented the treatment facility’s existing incineration process with an autoclave system and technology capable of treating up to eight 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 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 required additional emissions-related monitoring equipment and compliance. Such changes required us to incur capital expenditures, which are reflected in cash flows from investing activities in the Company’s consolidated statement of cash flows, in order to meet the requirements of the new regulations. 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 2015 and beyond. CRITICAL ACCOUNTING POLICIES Revenue Recognition : The Company recognizes revenue from product sales when goods are shipped or delivered, and title and risk of loss pass to the customer except for those sales via multiple-deliverable arrangements. Provisions for certain rebates, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed and segregated in the Company’s warehouse. 24 Table of Contents The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-deliverable revenue arrangements. Under this guidance, certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System™ (formerly the Sharps Disposal by Mail Systems ® ) and various TakeAway Environmental Return Systems™ referred to as “Mailbacks” and Sharps ® Pump 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. In accordance with 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. The selling price for the transportation revenue and the treatment revenue utilizes third party evidence. 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 owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. 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. 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. Stock-Based Compensation : T he 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, 2014, 2013 and 2012, was $438 thousand ($18 thousand included in cost of revenues and $420 thousand included in general and administrative expenses in the Company’s consolidated statement of operations), $514 thousand ($21 thousand included in cost of revenues and $493 thousand included in general and administrative expenses in the Company’s consolidated statement of operations) and $786 thousand ($68 thousand included in cost of revenues and $718 thousand included in general and administrative expenses in the Company’ 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 did not include any excess tax benefits in its cash flows from financing activities for the fiscal years ended June 30, 2014 and 2013 and included approximately $0.1 million as of June 30, 2012. For the years ended June 30, 2014 and 2013, excess tax benefits were eliminated by the valuation allowance on deferred tax assets. 25 Table of Contents RECENTLY ISSUED ACCOUNTING STANDARDS In May 2014, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. There is no option for early adoption. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016 (effective July 1, 2017 for the Company), including interim periods within that reporting period. The Company is currently evaluating the impact of the new guidance on its financial statements. 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 foresee any borrowing needs. 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-19 and are included herein by reference. None. 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, 2014 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, 2014. Changes in Internal Controls During the quarter ended June 30, 2014, there were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting. CEO and CFO Certifications Appearing immediately following the Signatures section of this report are certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this Annual Report on Form 10-K, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information, should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. 26 Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES 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 Company’s internal control over financial reporting as of June 30, 2014. 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 (1992) . Based on the assessment, the Company’s management concluded that, as of June 30, 2014, the Company's internal control over financial reporting was effective based on those criteria . None. PART III 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 20, 2014. 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, 2014, 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. 27 Table of Contents ITEM 9B. OTHER INFORMATION ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 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. 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 20, 2014. 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 20, 2014. 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 20, 2014. 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 20, 2014. PART IV 28 Table of Contents ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit Number Description of Exhibit 2.1 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). 3.1 Bylaws of Company (incorporated by reference from Exhibit 3.4 to Form 10-KSB, dated June 30, 1994). 3.2 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). 29 Table of Contents 3.3 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). 3.4 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). 3.5 Bylaws of Sharps Compliance Corp (incorporated by reference from Exhibit 3.2 to Form 8-K, filed May 10, 2010). 3.6 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). 4.1 Specimen Stock Certificate (incorporated by reference from Exhibit 4.4 to Form-10-KSB, filed September 29, 1998). 4.2 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. 10.1 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). 10.2 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). 10.3 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).* 10.4 Letter Agreement by and between Sharps Compliance Corp. and Al Aladwani dated March 24, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed March 12, 2008).* 10.5 Form of Restricted Stock Award Agreement dated June 9, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed June 9, 2008). 10.6 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). 10.7 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). 10.8 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) 10.9 Second Amendment to Lease Agreement 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 March 9, 2010). 10.10 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).* 10.11 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).* 10.12 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). ** 10.13 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). 30 Table of Contents 10.14 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). 10.15 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).* 10.16 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).* 10.17 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).* 10.18 Employment Agreement by and between Sharps Compliance, Inc. and Berkley C. Nelson dated February 28, 2013 (incorporated by reference to Exhibit 10.1 and Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed February 19, 2013). 10.19 Restated Credit Agreement effective April 30, 2013, by and between 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 on May 6, 2013). 10.20 Revolving Line of Credit effective April 30, 2013, 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 May 6, 2013). 10.21 Security Agreement effective April 30, 2013, by and between Sharps Compliance, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on May 6, 2013). 10.22 Letter Agreement between Sharps Compliance, Inc. and Brandon Beaver dated October 21, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed October 23, 2013).* 10.23 Letter Loan Agreement dated January 28, 2014, by and between Sharps Compliance, Inc. and a commercial bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014). 10.24 Revolving Line of Credit Promissory Note dated January 28, 2014, by and between Sharps Compliance, Inc. and a commercial bank (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014). 10.25 Security Agreement dated January 28, 2014, by and between Sharps Compliance, Inc. and a commercial bank. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on January 30, 2014). 10.26 Fourth Amendment to Lease Agreement dated as June 24, 2014, 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 on June 24, 2014). 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 Subsidiaries of Sharps Compliance Corp. (filed herewith).  31 Table of Contents 23.1 Consent of UHY LLP (filed herewith). 31.1 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). 101.INS XBRL Instance Document (filed herewith) 101.SCH XBRL Taxonomy Extension Schema Document (filed herewith) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith) 101.DEF XBRL Taxonomy Extension Linkbase Document (filed herewith) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (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. SIGNATURES 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. 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. 32 Table of Contents SHARPS COMPLIANCE CORP. Dated: August 27, 2014 By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer) Dated: August 27, 2014 By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer) Dated: August 27, 2014 By: /s/ DIANA P. DIAZ Diana P. Diaz Vice President Chief Financial Officer (Principal Financial and Accounting Officer) Dated: August 27, 2014 By: /s/ F. GARDNER PARKER F. Gardner Parker Chairman of the Board Of Directors Dated: August 27, 2014 By: /s/ JOHN W. DALTON John W. Dalton Director Dated: August 27, 2014 By: /s/ PARRIS H. HOLMES, JR. Parris H. Holmes, Jr. Director Dated: August 27, 2014 By: /s/ RENEE P. TANNENBAUM Renee P. Tannenbaum Director Dated: August 27, 2014 By: /s/ PHILIP C. ZERRILLO Philip C. Zerrillo Director SHARPS COMPLIANCE CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1 Table of Contents CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of June 30, 2014 and 2013 F-3 Consolidated Statements of Operations for the Years Ended June 30, 2014, 2013 and 2012 F-4 Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2014, 2013 and 2012 F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 2014, 2013 and 2012 F-6 Notes to Consolidated Financial Statements F-7 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, 2014, and 2013, 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, 2014. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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, 2014, and 2013, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2014, in conformity with accounting principles generally accepted in the United States of America. Houston, Texas August 27, 2014 F-2 Table of Contents SHARPS COMPLIANCE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and par value amounts) See accompanying notes to consolidated financial statements F-3 Table of Contents June 30, 2014 2013 ASSETS CURRENT ASSETS Cash and cash equivalents $ 13,717 $ 15,503 Restricted cash 111 111 Accounts receivable, net of allowance for doubtful accounts of $23 and $26, respectively 4,728 2,595 Legal settlement receivable 1,538 - Inventory 1,320 1,632 Prepaids and other current assets 474 583 TOTAL CURRENT ASSETS 21,888 20,424 PROPERTY, PLANT AND EQUIPMENT, net 3,858 4,440 INTANGIBLE ASSETS, net of accumulated amortization of $330 and $275, respectively 715 668 TOTAL ASSETS $ 26,461 $ 25,532 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,617 $ 1,085 Accrued liabilities 1,046 1,345 Deferred revenue 1,337 1,351 TOTAL CURRENT LIABILITIES 4,000 3,781 LONG-TERM DEFERRED REVENUE 524 579 OTHER LONG-TERM LIABILITIES 33 102 TOTAL LIABILITIES 4,557 4,462 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $0.01 par value per share; 20,000,000 shares authorized; 15,460,940 and 15,370,320 shares issued and outstanding, respectively 155 154 Treasury stock, at cost, 161,801 and 25,360 shares repurchased, respectively (681 ) (74 ) Additional paid-in capital 23,695 23,211 Accumulated deficit (1,265 ) (2,221 ) TOTAL STOCKHOLDERS' EQUITY 21,904 21,070 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,461 $ 25,532 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per-share data) See accompanying notes to consolidated financial statements F-4 Table of Contents Year Ended June 30, 2014 2013 2012 REVENUES $ 26,570 $ 21,530 $ 21,787 Cost of revenues 17,581 15,183 15,246 GROSS PROFIT 8,989 6,347 6,541 Selling, general and administrative 9,100 8,619 8,609 Legal settlement (1,538 ) - - Depreciation and amortization 462 437 453 OPERATING INCOME (LOSS) 965 (2,709 ) (2,521 ) OTHER INCOME (EXPENSE) Interest income 24 27 36 Other expense - (15 ) (13 ) TOTAL OTHER INCOME 24 12 23 INCOME (LOSS) BEFORE INCOME TAXES 989 (2,697 ) (2,498 ) INCOME TAX EXPENSE Current 33 15 88 Deferred - - 1,035 TOTAL INCOME TAX EXPENSE 33 15 1,123 NET INCOME (LOSS) $ 956 $ (2,712 ) $ (3,621 ) NET INCOME (LOSS) PER COMMON SHARE Basic $ 0.06 $ (0.18 ) $ (0.24 ) Diluted $ 0.06 $ (0.18 ) $ (0.24 ) WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE: Basic 15,289 15,255 15,109 Diluted 15,401 15,255 15,109 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) See accompanying notes to consolidated financial statements F-5 Table of Contents Common Stock Treasury Stock Retained Earnings Shares Amount Shares Amount Additional Paid-in Capital (Accumulated Deficit) Total Stockholders'Equity Balances, June 30, 2011 15,053,316 $ 151 - $ - $ 21,602 $ 4,112 $ 25,865 Exercise of stock options 89,443 - - - 65 - 65 Stock-based compensation - - - - 786 - 786 Issuance of restricted stock 63,368 1 - - (1 ) - - Excess tax benefit from stock-based award activity - - - - 85 - 85 Net loss - - - - - (3,621 ) (3,621 ) Balances, June 30, 2012 15,206,127 152 - - 22,537 491 23,180 Exercise of stock options 100,445 1 - - 161 - 162 Stock-based compensation - - - - 514 - 514 Issuance of restricted stock 63,748 1 - - (1 ) - - Shares repurchased - - (25,360 ) (74 ) - - (74 ) Net loss - - - - - (2,712 ) (2,712 ) Balances, June 30, 2013 15,370,320 154 (25,360 ) (74 ) 23,211 (2,221 ) 21,070 Exercise of stock options 13,125 - - - 47 - 47 Stock-based compensation - - - - 438 - 438 Issuance of restricted stock 77,495 1 - - (1 ) - - Shares repurchased - - (136,441 ) (607 ) - - (607 ) Net income - - - - - 956 956 Balances, June 30, 2014 15,460,940 $ 155 (161,801 ) $ (681 ) $ 23,695 $ (1,265 ) $ 21,904 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) See accompanying notes to consolidated financial statements F-6 Table of Contents Year Ended June 30, 2014 2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 956 $ (2,712 ) $ (3,621 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,105 1,103 1,117 Loss on disposal of property, plant and equipment - 16 83 Loss on inventory write-down 156 - - Stock-based compensation expense 438 514 786 Excess tax benefits from stock-based award activity - - (85 ) Deferred tax expense - - 1,035 Changes in operating assets and liabilities: Restricted cash - (111 ) - Accounts receivable (2,133 ) (380 ) 850 Legal settlement receivable (1,538 ) - - Inventory 156 587 (449 ) Prepaid and other current assets 109 27 247 Accounts payable and accrued liabilities 164 313 (388 ) Deferred revenue (69 ) (309 ) 114 NET CASH USED IN OPERATING ACTIVITIES (656 ) (952 ) (311 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (468 ) (909 ) (452 ) Additions to intangible assets (102 ) (222 ) (169 ) NET CASH USED IN INVESTING ACTIVITIES (570 ) (1,131 ) (621 ) CASH FLOWS FROM FINANCING ACTIVITIES Excess tax benefits from stock-based award activity - - 85 Proceeds from exercise of stock options 47 162 65 Shares repurchased (607 ) (74 ) - NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (560 ) 88 150 NET DECREASE IN CASH AND CASH EQUIVALENTS (1,786 ) (1,995 ) (782 ) CASH AND CASH EQUIVALENTS, beginning of year 15,503 17,498 18,280 CASH AND CASH EQUIVALENTS, end of year $ 13,717 $ 15,503 $ 17,498 SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid, net of refunds $ 22 $ 18 $ (445 ) SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 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 TRAC SM , 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, 2014, one customer represented approximately 20% of revenues. This customer represented approximately 13%, or $599 thousand, of the total accounts receivable balance as of June 30, 2014. For the fiscal year ended June 30, 2013, one customer represented approximately 22% of revenues. This customer represented approximately 25%, or $638 thousand, of the total accounts receivable balance as of June 30, 2013. For the fiscal year ended June 30, 2012, two customers represented approximately 30% of revenues. One of the customers was a major U.S. government agency which terminated January 31, 2012. 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 Herman Packaging 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 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. The Company also maintains funds in a savings account, which is 100% FDIC insured. Accounts Receivable : Accounts receivable consist primarily of amounts due to the Company from normal business activities. Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with the customer. The Company maintains an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third party collection agency. The Company has a history of minimal uncollectible accounts. F-7 Table of Contents SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of physical deterioration, obsolescence, changes in price levels and other causes. Total write-downs for the fiscal year ended June 30, 2014 were $156 thousand and were included in cost of goods sold. At June 30, 2014, total inventory was $1.3 million of which $0.6 million was finished goods and $0.7 million was raw materials. At June 30, 2013, total inventory was $1.6 million of which $0.7 million was finished goods and $0.9 million was raw materials. Property and Equipment : Property and equipment, including third party software and implementation costs, is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets. Additions, improvements and renewals significantly adding to the asset value or extending the life of the asset are capitalized. Ordinary maintenance and repairs, which do not extend the physical or economic life of the property or equipment, are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the results of operations for the period. Computer and software development costs, which include costs of computer software developed or obtained for internal use, all programming, implementation, and costs incurred with developing internal-use software, are capitalized during the development project stage. External direct costs of materials and services consumed in developing or obtaining internal-use computer software are capitalized. The Company expenses costs associated with developing or obtaining internal-use software during the preliminary project stage. Training and maintenance costs associated with system changes or internal-use software are expensed as incurred. Additionally, the costs of data cleansing, reconciliation, balancing of old data to the new system, creation of new/additional data and data conversion costs are expensed as incurred. Intangible Assets : Intangible assets consist of (i) permit costs related to the Company’s treatment facility in Carthage, Texas, (ii) eleven patents (two acquired in June 1998, one in November 2003, one in January 2012, two in April 2012, one in August 2012, one in September 2012, one in December 2012, one in November 2013 and one in January 2014), 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, 2014, 2013 and 2012, the Company recorded amortization expense of $55 thousand, $18 thousand and $30 thousand, respectively. As of June 30, 2014, future amortization of intangible assets is as follows (in thousands): F-8 Table of Contents Year Ending June 30, 2015 $ 56 2016 56 2017 54 2018 52 2019 52 Thereafter 445 $ 715 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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, 2014, 2013 and 2012, was $438 thousand ($18 thousand included in cost of revenues and $420 thousand included in general and administrative expenses in the Company’s consolidated statement of operations), $514 thousand ($21 thousand included in cost of revenues and $493 thousand included in general and administrative expenses in the Company’s consolidated statement of operations) and $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), 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 did not include any excess tax benefits in its cash flows from financing activities for the fiscal years ended June 30, 2014 and 2013 and included approximately $0.1 million as of June 30, 2012, respectively. For the years ended June 30, 2014 and 2013, excess tax benefits were eliminated by the valuation allowance on deferred tax assets. 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:\ 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 revenue 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. Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold”criteria and as such are recognized when the order is completed and segregated in the Company’s warehouse. The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-deliverable arrangements. Under this guidance, certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System™ (formerly the Sharps Disposal by Mail Systems ® ) and various TakeAway Environmental Return Systems™ referred to as “Mailbacks” and Sharps ® Pump 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-9 Table of Contents Year Ended June 30, 2014 2013 2012 Weighted average risk-free interest rate 0.6 % 0.5 % 0.3 % Weighted average expected volatility 52 % 58 % 66 % Weighted average expected life (in years) 4.04 4.61 3.89 Dividend yield - - - SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In accordance with 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. The selling price for the transportation revenue and the treatment revenue utilizes third party evidence. 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 owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. 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. 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 $457 thousand, $495 thousand and $578 thousand for the fiscal years ended June 30, 2014, 2013 and 2012, 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. During the years ended June 30, 2013 and 2012, an impairment loss of $129 thousand and $70 thousand, respectively, was recognized related to the leasehold improvements at the Atlanta, Georgia facility. No impairment loss was recognized during the year ended June 30, 2014. Employee Benefit Plans : In addition to group health related benefits, the Company maintains a 401(k) employee savings plan available to all full-time employees. The Company matches a portion of employee contributions with cash (25% of employee contribution up to 6%). Company contributions to the 401(k) plan were $31 thousand, $39 thousand and $38 thousand for the fiscal years ended June 30, 2014, 2013 and 2012, respectively, and are included in selling, general and administrative expenses. For purposes of the group health benefit plan and beginning February 1, 2013, the Company self-insures an amount equal to the excess of the employees’ deductible (range from $2,000 for each individual and family member covered) up to the amount by which the third party insurance coverage begins (ranges from $2,000 for individual up to $14,999 for family coverage). The amount of liability at June 30, 2014 and 2013 was $31 thousand and $28 thousand respectively, and is included in accrued liabilities. F-10 Table of Contents SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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, 2014 and 2013, the Company did not have any uncertain tax positions. The Company is subject to income taxes in the United States and in numerous state tax jurisdictions. During the fiscal year ended June 30, 2013, the Company began doing business in a number of additional states throughout the United States and began to file state income tax returns in such jurisdictions. Tax return filings which are subject to review by federal and state tax authorities by jurisdiction are as follows: • United States – fiscal years ended June 30, 2010, 2011, 2012, 2013, and 2014 • State of Texas – fiscal years ended June 30, 2010, 2011, 2012, 2013, and 2014 • State of Georgia – fiscal years ended June 30, 2011, 2012, 2013 and 2014 • State of Pennsylvania – fiscal years ended June 30, 2011, 2012, 2013, and 2014 • Other States – fiscal years ended June 30, 2013 and 2014 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 (Loss) Per Share : Earnings per share (“EPS”) data for all years presented has been computed under guidance that requires a presentation of basic and diluted EPS. Basic EPS excludes dilution and is determined by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the period adjusted for preferred stock dividends, if any. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock. Fair Value of Financial Instruments : The Company considers the fair value of all financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, not to be materially different from their carrying values at year-end due to their short-term nature. Segment Reporting : The guidance for disclosures about segments of an enterprise requires that a public business enterprise report financial and descriptive information about its operating segments. Generally, financial information is required to be reported on the basis used internally for evaluating segment performance and resource allocation. The Company operates in a single segment, focusing on developing cost-effective management solutions for medical waste and unused dispensed medications generated outside the hospital and large healthcare facility setting. F-11 Table of Contents SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. Recently Issued Accounting Standards : In May 2014, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. There is no option for early adoption. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016 (effective July 1, 2017 for the Company), including interim periods within that reporting period. The Company is currently evaluating the impact of the new guidance on its financial statements. NOTE 3 – PROPERTY, PLANT AND EQUIPMENT At June 30, 2014 and 2013, property, plant and equipment consisted of the following (in thousands): Total depreciation expense in the fiscal years ended June 30, 2014, 2013 and 2012 is $1.1 million in each of the respective periods. Depreciation expense included in cost of revenues in the fiscal years ended 2014, 2013 and 2012 was $643 thousand, $666 thousand and $664 thousand, respectively. NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT On January 28, 2014, the Company entered into a credit agreement with a commercial bank (“Credit Agreement”). The Credit Agreement, which replaces the prior credit agreement which was executed effective April 30, 2013 with another commercial bank (“Prior Credit Agreement”), provides for a two-year, $3.0 million line of credit facility, the proceeds of which may be utilized for working capital, letters of credit (up to $500,000) and general corporate purposes. Indebtedness under the Credit Agreement is secured by the Company’s accounts receivable and inventory with advances outstanding at any time limited to a Borrowing Base (as defined in the Credit Agreement) equal to 80% of eligible accounts receivable plus 50% of eligible inventory. Borrowings bear interest at WSJ Prime, which we estimate to be approximately 3.25% as of June 30, 2014. F-12 Table of Contents June 30, Useful Life 2014 2013 Furniture and fixtures 3 to 5 years $ 192 $ 192 Plant and equipment 3 to 17 years 6,153 5,422 Manufacturing 15 years 252 220 Computers and software 3 to 5 years 1,657 1,583 Leasehold improvements 3 to 15 years 897 897 Land 19 19 Construction-in-progress 7 376 9,177 8,709 Less: accumulated depreciation 5,319 4,269 Net property, plant and equipment $ 3,858 $ 4,440 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT (continued) The Company will pay a fee of 0.25% per annum on the unused amount of the line of credit. As of June 30, 2014, the Company had no outstanding borrowings, other than $335 thousand in letters of credit, which leaves $2.7 million of credit available. The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a minimum level of tangible net worth of $10.5 million and minimum liquidity of $5.0 million. The Company is in compliance with all the financial covenants as of June 30, 2014. The Credit Agreement, which expires on January 28, 2016, also contains customary events of default which, if uncured, may terminate the Credit Agreement and require immediate repayment of all indebtedness to the lenders. The Prior Credit Agreement, which was effective through January 28, 2014, provided for a cash-collateralized $200,000 line of credit facility with a maturity date of July 15, 2015. No amounts related to the Prior Credit Agreement were outstanding as of June 30, 2014 other than letters of credit of approximately $110 thousand, which are in the process of being released. NOTE 5 - INCOME TAXES The components of income tax expense (benefit) are as follows (in thousands): The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended June 30, 2014, 2013 and 2012 is as follows : F-13 Table of Contents Year ended June 30, 2014 2013 2012 Current Federal $ 13 $ - $ 80 State 20 15 8 33 15 88 Deferred Federal - - 1,038 State - - (3 ) - - 1,035 $ 33 $ 15 $ 1,123 Year Ended June 30, 2014 2013 2012 Statutory rate 34.0 % 34.0 % 34.0 % State income taxes, net (6.9 %) (0.4 %) 0.0 % Meals and entertainment 1.2 % (0.5 %) (0.5 %) Prior year adjustments and other (4.0 %) 0.5 % 0.0 % Effective rate before valuation allowance 24.3 % 33.6 % 33.5 % Change in valuation allowance (21.0 %) (34.2 %) (78.5 %) Effective tax rate 3.3 % (0.6 %) (45.0 %) SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 5 - INCOME TAXES (continued) For fiscal year ended June 30, 2014 and 2013, state income taxes relate to the Texas Franchise Tax and state taxes in other multiple states. For the fiscal year ended June 30, 2012, state income taxes relate to the Texas Franchise Tax and Georgia Income Tax. During the years ended June 30, 2013 and 2012, the Company recorded $0.9 million and $2.0 million, respectively, to establish a deferred tax valuation allowance to fully reserve net deferred tax assets. During the year ended June 30, 2014, the Company recorded $0.2 million release of the deferred tax valuation allowance due to taxable income generated. 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 eight of the past twelve 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 tax assets 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 tax assets related to net operating loss carryforwards and other tax attributes. At June 30, 2014 and 2013, the significant components of deferred tax assets and liabilities are approximated as follows (in thousands): During the year ended June 30, 2014, net deferred tax assets decreased $0.2 million which was fully offset by release of a portion of the valuation allowance. The decrease was primarily due to the use of tax loss carryforwards for the year ended June 30, 2014. During the year ended June 30, 2014, the Company utilized net operating loss carryforwards for income tax purposes of approximately $1.0 million which had previously been fully offset by a deferred tax valuation allowance in the prior year. During the year ended June 30, 2013, the Company did not utilize any net operating loss carryforwards for income tax purposes. At June 30, 2014, the Company had net operating loss carryforwards of $5.0 million which will expire, if unused, between June 30, 2031 and June 30, 2033. At June 30, 2014, the Company had various tax credit carryforwards of $0.4 million, of which $0.2 million will expire by June 30, 2031 and $0.2 million which may be carried forward indefinitely. F-14 Table of Contents June 30, 2014 2013 Deferred tax assets relating to: Stock compensation $ 834 $ 695 AMT and research and development credits 410 397 Deferred rent 23 106 Inventory 58 81 Professional fees 51 106 Accrued vacation 23 21 Accounts receivable allowance 8 9 Contribution carryovers 14 4 Net operating loss carryforwards 1,751 2,076 Total deferred tax assets 3,172 3,495 Deferred tax liablities related to depreciation differences (487 ) (611 ) Net deferred tax assets before valuation allowance 2,685 2,884 Valuation allowance (2,685 ) (2,884 ) Net deferred tax assets $ - $ - SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 6 - EQUITY TRANSACTIONS During the years ended June 30, 2014, 2013 and 2012, stock options to purchase shares of the Company’s common stock were exercised as follows: On January 7, 2013, the Company announced that its Board of Directors approved a stock repurchase program effective January 3, 2013, authorizing the Company to repurchase in the aggregate up to $3 million of its outstanding common stock over a two-year period. During the years ended June 30, 2014, 2013 and 2012, shares were repurchased as follows: Total shares repurchased under the program are 161,801 shares at a cost of $0.7 million. As of June 30, 2014, approximately $2.3 million remained of the Company’s $3.0 million repurchase program. The Company purchased all shares with cash resources. 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 is intended to replace 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 598,999 shares are outstanding as of June 30, 2014. 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, provides 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 364,917 shares are outstanding as of June 30, 2014. 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, 2014, 2013 and 2012, options available for grant under the Plans are as follows: F-15 Table of Contents Year Ended June 30, 2014 2013 2012 Options Exercised 13,125 100,445 89,443 Proceeds (in thousands) $ 47 $ 162 $ 65 Average exercise price per share $ 3.53 $ 1.62 $ 0.73 Year Ended June 30, 2014 2013 2012 Shares repurchased 136,441 25,360 - Cash paid for shares repurchased (in thousands) $ 607 $ 74 $ - Average price paid per share $ 4.45 $ 2.93 $ - June 30, 2010 Stock Plan 1993 Stock Plan Total 2014 139,267 269,494 408,761 2013 296,308 259,744 556,052 2012 372,384 144,173 516,557 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 7 - STOCK BASED COMPENSATION (continued) The summary of activity for all stock options during the fiscal years ended June 30, 2014, 2013 and 2012 is presented in the table below (in thousands except per share amount): The summary of activity for all restricted stock during the fiscal years ended June 30, 2014, 2013 and 2012 is presented in the table below (in thousands): The weighted average fair value per share of restricted stock granted during the fiscal years ended June 30, 2014, 2013, and 2012 was $4.84, $2.48 and $4.46, respectively. The weighted average fair value per share of restricted stock which vested during the fiscal years ended June 30, 2014, 2013 and 2012 was $4.25, $3.01 and $4.47, respectively. F-16 Table of Contents Options Outstanding Weighted Average Exercise Price Balance, June 30, 2011 888 $ 4.43 Granted 320 $ 3.97 Exercised (89 ) $ 0.73 Forfeited or canceled (41 ) $ 4.23 Balance at June 30, 2012 1,078 $ 4.60 Granted 178 $ 2.90 Exercised (100 ) $ 1.62 Forfeited or canceled (280 ) $ 5.82 Balance at June 30, 2013 876 $ 4.21 Granted 244 $ 3.95 Exercised (13 ) $ 3.53 Forfeited or canceled (157 ) $ 3.50 Balance at June 30, 2014 950 $ 4.27 Exercisable at June 30, 2014 578 $ 4.56 Year Ended June 30, 2014 2013 2012 Unvested at beginning of the year 15 17 - Granted 62 62 81 Vested (62 ) (64 ) (64 ) Forfeited - - - Unvested at end of the year 15 15 17 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 7 - STOCK BASED COMPENSATION (continued) The following table summarizes information about stock options outstanding as of June 30, 2014 (in thousands except per share amount): The following table summarizes information about stock options exercisable as of June 30, 2014 (in thousands except per share amount): As of June 30, 2014, there was $298 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 2.8 years. NOTE 8 - COMMITMENTS AND CONTINGENCIES Operating Leases: The Company leases 170,489 square feet of space in Houston, Texas and Atlanta, Georgia. The lease for warehouse space in Houston, Texas was extended in June 2014. 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 January 2015 to August 2020 with options to renew the Company’s leases for warehouses for 5 years and for office space for 10 years. Rent expense for the fiscal years ended June 30, 2014, 2013 and 2012 was $1.3 million, $1.2 million and $1.4 million, respectively. Future minimum lease payments under non-cancelable operating leases as of June 30, 2014 are as follows (in thousands): F-17 Table of Contents Options Outstanding Range of Exercise Price Outstanding as of June 30, 2014 Weighted Average Remaining Life (in Years) Weighted Average Exercise Price $ 0.00 - $2.50 99 1.35 $ 2.10 $ 2.51 - $3.50 192 5.55 $ 2.95 $ 3.51 - $5.50 560 4.34 $ 4.36 $ 5.51 - $7.50 - - $ - $ 7.51- $9.50 99 2.12 $ 8.50 950 $ 4.27 Options Exercisable Range of Exercise Price Exercisable as of June 30, 2014 Weighted Average Remaining Life (in Years) Weighted Average Exercise Price $ 0.00 - $2.50 99 1.35 $ 2.10 $ 2.51 - $3.50 34 3.26 $ 2.87 $ 3.51 - $5.50 347 3.57 $ 4.32 $ 5.51 - $7.50 - - $ - $ 7.51- $9.50 98 2.12 $ 8.50 578 $ 4.56 Twelve Months Ending June 30, 2015 2016 2017 2018 2019 Thereafter Operating lease obligations $ 735 $ 526 $ 631 $ 644 $ 659 $ 788 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued) Legal Settlement: On June 30, 2014, the Company entered an agreement to settle its claims against the United States government and various agencies related to the January 2012 termination of the Company’s February 2009 contract with the Centers for Disease Control and Prevention (“CDC”). The settlement agreement resulted in a cash payment of $1.5 million which was received by the Company in July 2014. 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. In accordance with guidance related to share-based payment arrangements, the Company’s restricted stock awards are treated as outstanding for earning per share calculations since these shares have full voting rights and are entitled to participate in dividends declared on common shares, if any, and undistributed earnings. As participating securities, the shares of restricted stock are included in the calculation of basic EPS using the two-class method. For the periods presented, the amount of earnings allocated to the participating securities was not material. The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per share amount): F-18 Table of Contents Year Ended June 30, 2014 2013 2012 Net income (loss), as reported $ 956 $ (2,712 ) $ (3,621 ) Weighted average common shares outstanding 15,289 15,255 15,109 Effect of dilutive stock options 112 - - Weighted average diluted common shares outstanding 15,401 15,255 15,109 Net income (loss) per common share Basic $ 0.06 $ (0.18 ) $ (0.24 ) Diluted $ 0.06 $ (0.18 ) $ (0.24 ) Employee stock options excluded from computation of diluted income per share amounts because their effect would be anti-dilutive 655 728 831 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014, 2013 and 2012 NOTE 10 – SELECTED QUARTERLY FINANCIAL DATA (Unaudited) The following tables show quarterly financial information for the years ended June 30, 2014 and 2013. The Company believes that all necessary adjustments have been included in the amounts below to present fairly the results of such periods (in thousands expect per share amounts). F-19 Table of Contents Quarter Ended September 30, 2013 December 31, 2013 March 31, 2014 June 30, 2014 Total revenues $ 6,272 $ 7,649 $ 5,553 $ 7,096 Cost of revenues $ 3,948 $ 4,960 $ 4,144 $ 4,529 Operating income (loss) $ 130 $ 120 $ (935 ) $ 1,650 Net income (loss) $ 122 $ 120 $ (935 ) $ 1,649 Net income (loss) per share - diluted $ 0.01 $ 0.01 $ (0.06 ) $ 0.11 Weighted average shares-diluted 15,366 15,438 15,248 15,381 Quarter Ended September 30, 2012 December 31, 2012 March 31, 2013 June 30, 2013 Total revenues $ 5,153 $ 5,717 $ 5,410 $ 5,250 Cost of revenues $ 3,601 $ 4,017 $ 3,894 $ 3,671 Operating income (loss) $ (641 ) $ (431 ) $ (942 ) $ (695 ) Net income (loss) $ (639 ) $ (428 ) $ (955 ) $ (690 ) Net income (loss) per share - diluted $ (0.04 ) $ (0.03 ) $ (0.06 ) $ (0.05 ) Weighted average shares-diluted 15,209 15,232 15,246 15,333 Exhibit 21.1 Subsidiaries of the Registrant Name Jurisdiction of Incorporation Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.) Texas Sharps e-Tools.com, Inc. Delaware Sharps Safety, Inc. Texas Sharps Manufacturing, Inc. Delaware Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.) Delaware 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 27, 2014, with respect to the consolidated financial statements of Sharps Compliance Corp. and subsidiaries (the “Company”) as of June 30, 2014 and 2013, and for each of the three fiscal years in the period ended June 30, 2014, which appears in this Annual Report on Form 10-K for the year ended June 30, 2014. /s/ UHY LLP Houston, Texas August 27, 2014 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 proceduresto 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 27, 2014 By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer) 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 proceduresto 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 27, 2014 By: /s/ DIANA P. DIAZ Diana P. Diaz Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 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, 2014, as filed with the Securities and Exchange Commission on the date hereof, I, David P. Tusa, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that: (1) The Form 10-K report for the year ended June 30, 2014, filed with the Securities and Exchange Commission on August 27, 2014 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, 2014 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp. Date: August 27, 2014 By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer) 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, 2014, 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, 2014, filed with the Securities and Exchange Commission on August 27, 2014, 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, 2014 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp. Date: August 27, 2014 By: /s/ DIANA P. DIAZ Diana P. Diaz Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 

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