Sharps Compliance
Annual Report 2018

Plain-text annual report

UNITED STATES SECURITIESAND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2018OR☐TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission File Number: 001-34269SHARPS COMPLIANCE CORP.(Exact name of registrant as specified in its charter)Delaware 74-2657168(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)9220 Kirby Drive, Suite 500, Houston, Texas77054(Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code (713) 432-0300Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassName of Each Exchange on Which RegisteredCommon Shares, $0.01 Par ValueThe NASDAQ Capital MarketSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ýIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ýIndicate 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 12months (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 ý No ☐Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 submitand post such files). Yes ý No ☐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’sknowledge, 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. ý1Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ý Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ýAs of December 29, 2017, the aggregate market value of the registrant’s Common Stock held by non-affiliates was approximately $54.0 million (based on the closing price of $4.09on December 29, 2017 as reported by The NASDAQ Capital Market). For purposes of this computation only, all executive officers, directors and 10% beneficial owners of theregistrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive offices, directors or 10% beneficial owners are affiliates.The number of common shares outstanding of the Registrant was 16,082,021 as of August 20, 2018.DOCUMENTS INCORPORATED BY REFERENCE:(1)Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for the AnnualMeeting of Shareholders to be held on November 15. 2018 are incorporated by reference into Part III.2Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESTABLE OF CONTENTS *ANNUAL REPORT ON FORM 10-KPART IItem 1Business4Item 1ARisk Factors13Item 1BUnresolved Staff Comments17Item 2Properties17Item 3Legal Proceedings17Item 4Mine Safety Disclosures17PART IIItem 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities17Item 6Selected Financial Data18Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations19Item 8Financial Statements and Supplementary Data28Item 9Changes In and Disagreements with Accountants on Accounting and Financial Disclosure28Item 9AControls and Procedures28Item 9BOther Information29PART IIIItem 10Directors, Executive Officers and Corporate Governance29Item 11Executive Compensation29Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters29Item 13Certain Relationships and Related Transactions and Director Independence29Item 14Principal Accountant Fees and Services29PART IVItem 15Exhibits and Financial Statement Schedules30Item 16Form 10-K Summary31Signatures32 *This Table of Contents is inserted for convenience of reference only and is not a part of this Report as filed. 3Table of ContentsINFORMATION REGARDING FORWARD-LOOKING STATEMENTSThis annual report on Form 10-K contains certain forward-looking statements and information relating to the Company and its subsidiaries that are basedon the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. Whenused in this report, the words “will,” “may,” “position,” “plan,” “potential,” “continue,” “anticipate,” “believe,” “expect,” “estimate,” “project” and“intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identifyforward-looking statements. Such statements reflect known and unknown risks, uncertainties and assumptions related to certain factors, including withoutlimitation, 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 otherfactors described herein. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlyingassumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the riskfactors and other cautionary statements in this Annual Report on Form 10-K. Actual results may vary materially. You are cautioned not to place unduereliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and as such should notconsider the preceding list or the risk factors to be a complete list of all potential risks and uncertainties. The Company does not intend to update theseforward-looking statements.PART IITEM 1. BUSINESSSharps Compliance Corp. was formed in November 1992 as a Delaware corporation. The information presented herein is for Sharps Compliance Corp. and itswholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.), Sharps e-Tools.com Inc. (“Sharps e-Tools”), SharpsManufacturing, Inc., Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.), Sharps Safety, Inc., Alpha Bio/Med ServicesLLC, Bio-Team Mobile LLC and Citiwaste, LLC (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 asreasonably practicable after the reports are filed with the SEC. The filings are also available via the SEC’s website at www.sec.gov.COMPANY OVERVIEWSharps Compliance Corp. is a leading national healthcare waste management provider specializing in regulated waste streams including medical,pharmaceutical and hazardous. Our services facilitate the safe and proper collection, transportation and environmentally-responsible treatment of regulatedwaste from customers in multiple healthcare-related markets. The markets we manage are small to medium-size generators of healthcare waste includingprofessional offices (ambulatory surgical centers, physician groups, dentists and veterinarians), assisted living and long-term care facilities, governmentagencies, home health care, retail clinics and immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in thehome setting such as sharps, lancets and ultimate-user medications which generates business relationships with pharmaceutical manufacturers and othermarkets to provide safe and proper disposal. Lastly, we maintain a strong distribution network for the sale of our solutions within the aforementioned markets.We assist our customers in determining solutions that best fit their needs for the collection, transportation and treatment of regulated medical, pharmaceuticaland hazardous waste. Our differentiated approach provides our customers the flexibility to transport waste via direct route-based services, the United StatesPostal Service (“USPS”) or common carrier dependent upon quantity of waste generated, cost savings and facility needs. Our comprehensive servicesapproach includes a single point of contact, consolidated billing, integrated manifest and proof of destruction repository. Furthermore, we providecomprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal andcompliance requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and continued recurring revenuegrowth.Our flagship products are the Sharps Recovery System™ and MedSafe® Medication Disposal System. These two product offerings account for over 50% ofcompany revenues. The Sharps Recovery System is a comprehensive medical waste management mailback solution used in all markets due to its cost-effective nature and nationwide availability. The MedSafe solution meets the immediate needs of an increasing community risk associated with unused,ultimate-user, medications. Developed in accordance with the4Table of ContentsDrug Enforcement Administration (“DEA”) implementation of the Secure and Responsible Drug Disposal Act of 2010 (the “Act”), MedSafe is a superiorsolution used in both private and public sectors to properly remove medications from communities and aid in the prevention of drug abuse.Over the past few years, the Company has made a series of investments to build a robust direct service, route-based, pickup offering for medical,pharmaceutical and hazardous waste. We have built an infrastructure capable of covering more than 50% of the U.S. population with permitted trucks,transfer stations and treatment facilities. We continue to add routes and the infrastructure required for operational efficiency to reach more customers andprospects directly. Our route-based services, matched with comprehensive mailback solutions, offer us a key differentiator in the market and the ability tocapitalize on larger or regional contracts within the healthcare market. With the growth in infrastructure to support the route-based service, we havestrategically added new distribution for faster and more cost-effective delivery of products to customers.We continue to develop new solutions to meet market demands. Over the past five years we have added a robust portfolio of ultimate-user medicationdisposal solutions for controlled substances, DEA-inventory controlled medication disposal for professionals, route-based services for medical,pharmaceutical and hazardous waste and the TakeAway Recycling System™ for single-use devices (SUDs). The TakeAway Recycle System is an excitingnew solution for the Company as it is a relatively new solution for the market. Single-use devices are constructed of materials capable of being recycledincluding plastics, metals, circuit boards and batteries. With an increased emphasis for more sustainable solutions, the TakeAway Recycle System is a much-needed complement to the single-use device market. Our principal executive offices are located at 9220 Kirby Drive, Suite 500, Houston, Texas. Our telephone number at that location is (713) 432-0300. Wecurrently have 148 full-time employees and 4 part-time employees. We have manufacturing, assembly, distribution and warehousing operations located inHouston, Texas. We own and operate a fully-permitted treatment facility in Carthage, Texas that incorporates our processing and treatment operations. TheCarthage facility offers both steam sterilization, autoclave and high heat incineration for the proper treatment of regulated medical waste and non-hazardouspharmaceuticals. The autoclave system is utilized alongside the incinerator for day-to-day operations. We believe that our Texas facility is one of only tenpermitted commercial facilities in the United States capable of treating all types of medical waste and pharmaceuticals (i.e., both incineration and autoclavecapabilities). The Carthage location also serves as the Company's main facility for managing our recycling solution. In August 2016, the Company receivedthe Commonwealth of Pennsylvania Department of Environmental Protection Bureau of Waste Management permit for the processing of medical waste at itstreatment facility located in northeastern Pennsylvania. The 40,000 square foot facility has been permitted as both a medical waste treatment facility, usingan autoclave, and as a transfer station for medical, pharmaceutical and trace chemotherapy waste of up to 82 tons per day. The facility is designed to cost-effectively and efficiently process medical waste generated by the Company’s route-based and mailback customers and doubles as a distribution center ofmailback solutions and has been in operation since November 2016. The Company’s route-based pickup service business covers over 50% of the U.S.population in areas throughout the South, Southeast and Northeast.SOLUTIONS OVERVIEWWe offer a broad line of product and service solutions to manage the medical waste and unused dispensed medications generated by our customers. Ourprimary solutions include the following:Sharps Recovery System™ (formerly Sharps Disposal by Mail System®) : a comprehensive solution for the containment, transportation, treatment andtracking of regulated medical waste generated outside the hospital and large health care facility setting. The Sharps Recovery System includes a securelysealed, leak and puncture resistant sharps container in several sizes ranging from one quart to twenty-eight gallons; USPS-approved shipping box withprepaid priority mail postage; absorbent material inside the container that can safely hold up to 150 milliliters of fluids; a bag for additional containment andcomplete documentation and tracking manifest. The Sharps Recovery System is transported to our owned or contracted facilities for treatment. Upontreatment or conversion of the waste, we provide electronic proof of receipt and treatment documentation to the customer through our proprietarySharpsTracer® system.Route-Based Pickup Service: as a full-service waste management services company, we offer route-based medical and hazardous waste pickup services tocustomers and prospects that have facilities or branches that generate larger quantities of medical, pharmaceutical (non-controlled) and limited quantities ofhazardous waste or where the route-based pickup service is preferred. This blended service of mailback and pickup provides cost-savings benefits bycustomizing the right solution with each location to reach the best outcome for the customer.MedSafe®: a patent-pending solution for the safe collection, transportation and proper disposal of unwanted or expired ultimate-user medications, includingcontrolled substances. MedSafe has been designed to meet or exceed the regulations issued by the5Table of ContentsDEA implementing the Act, which became effective October 9, 2014. MedSafe is designed for use in retail pharmacies, long-term care facilities, hospice,hospitals/clinics with on-site pharmacies, narcotic treatment facilities and licensed law enforcement.TakeAway Medication Recovery System™ : a comprehensive solution designed to meet or exceed the regulations issued by the DEA implementing the Act,which became effective October 9, 2014. The solution facilitates the proper disposal of unused medications (including controlled substances) from ultimateusers, which is designed for use in the long-term care, hospice and consumer markets.TakeAway Medication Recovery™ DEA Reverse Distribution for Registrants: a DEA-compliant collection, return and destruction solution for DEAregistrants’ expired or unused controlled substances. The system includes prepaid return transportation, materials to package for return, completedocumentation of returned pharmaceuticals and proper disposal with online proof of destruction.TakeAway Recycle System™: a solution for the collection and recycling of single-use medical devices from surgical centers and other healthcare facilities.The system consists of containers designed for use in operating rooms or sterile processing departments. The containers are placed in a pre-paid return box forshipping to our treatment facilities where devices are stripped to their basic components and sent to appropriate recycling facilities. The system adds a much-needed solution to the market in which many single-use devices are reprocessed or disposed of as regulated medical waste, resulting in wastes that could berecycled.ComplianceTRACSM: a more advanced web-based version of the Company’s compliance and training program. ComplianceTRAC is designed to improveworker safety while satisfying applicable Occupational Safety and Health Administration (“OSHA”) and other requirements for the end-user. The programincludes employee training for bloodborne pathogens, compliance with the Health Insurance Portability and Accountability Act of 1996 and the HazardousCommunication Standard. The online program also provides access to a database of over a million safety data sheets (formerly, material safety data sheets),safety plans, regulatory information and facility self-audits. The program is designed to replace outdated hard copy manuals with an updated platformavailable 24/7.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 asa complement to the Company’s line of medical waste and unused medication management solutions.Other Solutions: a wide variety of other solutions including TakeAway Environmental Return System™, SharpsTracer ®, Sharps Secure ® Needle DisposalSystem, Complete Needle™ Collection & Disposal System, Pitch-It IV™ Poles, Asset Return System, Sharps ® MWMS™ (a Medical Waste ManagementSystem (“MWMS”)) and Spill Kit and Recovery System.MARKET OVERVIEWThe Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare facilities, pharmaceuticalmanufacturers, home healthcare providers, assisted living/long-term care, retail pharmacies and clinics and the professional market which is comprised ofphysicians, dentists, surgery centers and veterinary practices. These markets require cost-effective services for managing medical, pharmaceutical andhazardous waste.The Company believes its growth opportunities are supported by the following:•A large professional market that consists of dentists, veterinarians, clinics, physician groups, urgent care facilities, ambulatory surgical centers andother healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous wastewhere we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from twodirections: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service alongwith our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on theindividual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long term carefacilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based serviceswhere the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing over 50% ofthe U.S. population.•In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions ofroute-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. In July 2016, the Companyacquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in theNortheast. Through a combination of6Table of Contentsacquisition and organic growth, the Company now offers route-based pickup services in a twenty-three (23) state region of the South, Southeast andNortheast portions of the United States. The Company directly serves more than 10,300 customer locations with route-based pickup services. Withthe addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., theCompany offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generatelarger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline isattributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service areintegrated into the offering.•The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2012 Population Estimates and National Projections,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 long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, theCompany delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of eachfacility.•The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increasedpromotion of the Sharps Recovery System. According to the Centers for Disease Control ("CDC"), 38.5% of adults received a flu shot and 28.2% offlu shots for adults were administered in a retail clinic. Over the flu seasons from 2011 to 2018, the Company saw growth in five years of 10% to36% and declines in three years of 13% to 17%. Despite the volatility, Sharps believes the Retail market should continue to contribute to long-termgrowth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.•The passage of regulations for ultimate-user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway MedicationRecovery System envelopes) that meet the regulations for ultimate-user controlled substances disposal (Schedules II-V) to retail pharmacies.Additionally, with the new regulations, the Company is able to provide the MedSafe and TakeAway Medication Recovery Systems to assistedliving and hospice to address a long-standing issue within long-term care.•Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste — the Company’s SharpsRecovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings,schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to governmentagencies in need of proper and regulatory compliant medication disposal. The federal government, state agencies and non-profits are recognizingthe need to fund programs that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for proper medicationdisposal are being funded for prevention programs.•With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the SharpsRecovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensiveservices to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting,fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection& Disposal System, respectively.•A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unusedmedication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle DisposalSystem, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes.•The Company continually develops new solution offerings such as ultimate user medication disposal (MedSafe and TakeAway MedicationRecovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEAReverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers andother healthcare facilities (TakeAway Recycle System).7Table of ContentsCOMPETITIVE STRENGTHSWe believe our competitive strengths include the following:Leading national healthcare waste management provider specializing in regulated waste streams, including medical, pharmaceutical, and hazardous.Sharps Compliance Corp. is a leading national healthcare waste management provider specializing in regulated waste streams including medical,pharmaceutical and hazardous. Our services facilitate the safe and proper collection, transportation and environmentally-responsible treatment of regulatedwaste from customers in multiple healthcare-related markets. The markets we manage are small to medium-size generators of healthcare waste includingprofessional offices (ambulatory surgical centers, physician groups, dentists and veterinarians), assisted living and long-term care facilities, governmentagencies, home health care, retail clinics and immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in thehome setting such as sharps, lancets and ultimate-user medications which generates business relationships with pharmaceutical manufacturers and othermarkets to provide safe and proper disposal. Lastly, we maintain a strong distribution network for the sale of our solutions within the aforementioned markets.We assist our customers in determining solutions that best fit their needs for the collection, transportation and treatment of regulated medical, pharmaceuticaland hazardous waste. Our differentiated approach provides our customers the flexibility to transport waste via direct route-based services, USPS or commoncarrier dependent upon quantity of waste generated, cost savings and facility needs. Our comprehensive services approach includes a single point of contact,consolidated billing, integrated manifest and proof of destruction repository. Furthermore, we provide comprehensive tracking and reporting tools thatenable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance requirements. We believe the fully-integratednature of our operations is a key factor leading to our success and continued recurring revenue growth. Over the past few years, the primary focus of ourmarketing efforts has been on educating the marketplace about us as an alternative to the historical provider of waste services, including medical,pharmaceutical and hazardous.Vertically-integrated full-service operations.Our operations are fully integrated, including manufacturing, assembly, distribution, treatment, online tracking and customer reporting. We havemanufacturing, assembly, distribution and warehousing operations located in Houston, Texas. We own and operate a fully-permitted treatment facility inCarthage, Texas that incorporates our processing and treatment operations. The Carthage facility offers both steam sterilization, autoclave and high heatincineration for the proper treatment of regulated medical waste and non-hazardous pharmaceuticals. The autoclave system is utilized alongside theincinerator for day-to-day operations. We believe that our Texas facility is one of only ten permitted commercial facilities in the United States capable oftreating all types of medical waste and pharmaceuticals (i.e., both incineration and autoclave capabilities). The Carthage location also serves as theCompany's main facility for managing our recycling solution. In August 2016, the Company received the Commonwealth of Pennsylvania Department ofEnvironmental Protection Bureau of Waste Management permit for the processing of medical waste at its treatment facility located in northeasternPennsylvania. The 40,000 square foot facility has been permitted as both a medical waste treatment facility, using an autoclave, and as a transfer station formedical, pharmaceutical and trace chemotherapy waste of up to 82 tons per day. The facility is designed to cost-effectively and efficiently process medicalwaste generated by the Company’s route-based and mailback customers and doubles as a distribution center of mailback solutions and has been in operationsince November 2016. The Company’s route-based pickup service business covers over 50% of the U.S. population in areas throughout the South, Southeastand Northeast. We track the movement of each shipment from outbound shipping to ultimate treatment and provide confirmation to the customer for theirrecords using our proprietary SharpsTracer tracking and documentation system. We also track treatment volumes associated with pickup services provided aspart of our blended product portfolio using SharpsTracer. We also provide customized reporting and comprehensive regulatory support for many of ourcustomers. 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 a key factor anddifferentiator leading to our success and leadership position in our industry.Highly scalable business model.Because of our business model, we can add new business while leveraging our existing infrastructure. Our facilities can accommodate significant additionalvolume, incurring only variable costs of transportation and processing. Once we gain a new customer, our profitability typically increases as our customerbase grows with minimal additional overhead expense due to the embedded nature of our products and the ease with which we can accommodate additionalvolume.8Table of ContentsDiverse product markets.Sharps offers services and products to a wide variety of end markets. The Company’s growth strategies are focused on our key markets which includeprofessional offices (ambulatory surgical centers, physician groups, dentists and veterinarians), assisted living and long-term care facilities, governmentagencies, home health care, retail clinics and immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in thehome setting such as sharps, lancets and ultimate-user medications which generates business relationships with pharmaceutical manufacturers and othermarkets to provide safe and proper disposal.Our billings by market for the years ended June 30, 2018, 2017 and 2016 are below (as expressed in percentages of revenues): Year Ended June 30, 2018 2017 2016BILLINGS BY MARKET*: Professional33% 31% 22%Home Health Care20% 21% 22%Retail20% 19% 26%Pharmaceutical Manufacturer11% 16% 17%Assisted Living7% 6% 6%Government5% 4% 4%Environmental2% 1% 1%Other2% 2% 2% 100% 100% 100%*Customer billings, a non-GAAP measure, includes all invoiced amounts for products shipped during the period reported. GAAP revenue includes customerbillings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition of certain revenueassociated with product returned for treatment and destruction and (iii) provisions for certain rebates, product returns, and discounts to customers whichare accounted for as reductions in sales in the same period the related sales are recorded. The difference between customer billings and GAAP revenue isreflected in the Company's balance sheet as deferred revenue. See Note 2 “Summary of Significant Accounting Policies” in “Notes to ConsolidatedFinancial Statements”. The Company believes this information about customer billings is useful to investors and other invested parties.Increased state and federal regulatory attention.To protect citizens and waste workers from needle stick injuries, ten states have passed state-wide legislation or regulations making it illegal to discard usedsharps into household trash. Numerous cities, such as Seattle, have passed ordinances making household sharps disposal illegal. Almost all other states, aswell as the District of Columbia and territories have passed educational requirements or released strict guidelines regarding home sharps disposal. Whetherlegislation or strict guidelines, most of the U.S. population is required or strongly encouraged to not place used sharps in the household trash. In addition,several states and counties have passed ordinances requiring businesses such as hospitals and those that sell syringes to the public, such as retail pharmaciesand veterinary clinics, to take back 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 haveintroduced legislation over the last few years intended to manage the disposal of consumer unused medications. Seven states and the District of Columbiahave successfully passed such legislation. Passed or pending legislation related to disposal of consumer medications covers about two-thirds of the U.S.population. Further, since 2009, the federal government, nine states and several counties have introduced legislation requiring manufacturer responsibilityfor consumer generated unused medications. State regulatory agencies are also addressing this issue, including multiple states which now require healthcareproviders to avoid sewer and trash disposal of non-hazardous unused medications within their facilities. States such as California, Washington and Minnesotahave required assessment and proper treatment by a medical waste disposal company for years. However, other states such as Colorado and Florida are nowrequiring even small healthcare providers to segregate unused medications for proper disposal. In 2010, Congress passed the Secure and Responsible DrugDisposal Act, leading to DEA changes to the Controlled Substances Act in 2014, allowing certain DEA registrants to collect controlled substances from thepublic. Collection receptacles can now be found in retail pharmacies, long-term care facilities and hospitals throughout the country. In9Table of Contentsaddition, states are beginning to more closely scrutinize generators returning through reverse distribution unused inventory medications classified asqualifying for manufacturer credit that are actually waste pharmaceuticals and should be disposed of as such. As state and federal enforcement of thesestatutes increases, more companies could turn to solutions such as ours to help manage their medical waste and regulatory compliance. We believe we arewell 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 theeffects of potentially hazardous waste on the environment. Our patented Waste Conversion Process ™ repurposes regulated medical waste and unusedmedications into new resources used in industrial applications, such as the generation of electricity or recycled plastics used in the industrial sector. OurTakeAway Recycle System is a solution for the collection and recycling of single-use medical devices from surgical centers and other healthcare facilities.The system consists of containers designed for use in operating rooms or sterile processing departments. The containers are placed in a pre-paid return box forshipping to our treatment facilities where devices are stripped to their basic components and sent to appropriate recycling facilities. The system adds a much-needed solution to the market in which many single-use devices are reprocessed or disposed of as regulated medical waste, resulting in wastes that could berecycled. Our Universal Waste Shipback Program recycles the materials in light bulbs, batteries and other mercury-containing devices for use in newapplications. In addition, the use of recycled paper and plastic materials for many of our products further demonstrates our total commitment toenvironmentally sound business practices. As an organization, the Company is a leading proponent for the development of solutions for the safe disposal ofsharps, unused medications (including controlled substances), light bulbs, batteries and other mercury-containing devices in the community and continuallyworks 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 industriesand in companies with revenues up to $500 million. Ms. Diana P. Diaz, CPA, MBA, Vice President and Chief Financial Officer, has over 25 years of finance,accounting, healthcare and public company industry experience. Mr. Gregory C. Davis, Vice President of Operations, has over 20 years of informationtechnology and operations-related experience. Mr. Dennis Halligan, Vice President of Marketing, has broad marketing experience with the Company and at avariety of firms, including Stir Creative and R.J. Reynolds.GROWTH STRATEGIESWe plan to grow our business by employing the following primary growth strategies:Develop new products and services.We continue to develop new solution offerings including ultimate-user medication disposal (MedSafe and TakeAway Medication Recovery System),mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution forRegistrants) and shipback services for the collection and recycling of single-use devices (TakeAway Recycle System). These innovative product and serviceofferings allow us to gain further sales from existing customers as well as gain new customers who have a need for more comprehensive products. We willcontinue our efforts to develop new solution offerings designed to facilitate the proper and cost effective management of medical waste, pharmaceuticalwaste, hazardous waste and ultimate-user medication disposals to better serve our customers and the environment. Additionally, we will continue to seek outand identify prospective new customers and markets for new solutions designed to meet the needs of these new customer segments.Further penetrate existing customers and markets.The addition of direct-service hazardous waste capabilities to our existing route-based regulated medical waste customers adds a viable cross-sellingopportunity for the Company. While we offer hazardous waste services nationwide, the ability to directly service increases operational efficiencies andprovides a better priced solution for the customer. In addition to hazardous waste services, the Company has multiple pharmaceutical waste solutions forcross-selling within the existing customer base including DEA-registrant disposal, non-controlled medication disposal and RCRA pharmaceutical disposal.The Company is a single-service provider for multiple healthcare-related waste generated in small to mid-size generators.10Table of ContentsA new market for the Company is recycling of single-use devices. The interest from healthcare institutions in safer and more sustainable offerings hasgenerated a full line of single-use devices and a tendency towards recycling at end of life rather than disposal in landfills. The opportunity to provide arecycling solution to surgical operatories that use these single-use devices offers the Company an exciting and sustainable solution in a new market. Further,we are able to develop solutions specific for single-use device manufacturers, building new relationships with manufacturers looking for a key marketingdifferentiator.Many of our customers who currently use the Sharps Recovery System could also benefit from the TakeAway Medication Recovery System, Medsafe, ourhazardous waste solutions, our universal waste solutions or other specialized products. Although currently focused primarily on the proper management ofmedical and pharmaceutical wastes generated by medical professionals, pharmacies (including chains and mail order), assisted living facilities and otherrelated organizations will develop needs for our other product lines as they expand their patient service offerings. As an entrenched and value-added supplierof treatment solutions, we believe the Company has the ability to capture incremental business from our existing customers.The Company’s Pharmaceutical Manufacturer billings have grown from $0.3 million to $4.5 million for the years ended June 30, 2011 and 2018,respectively. We continue to see increased interest in our patient support program solution among pharmaceutical manufacturers as it relates to self-injectablemedications especially related to new drug launches. We believe manufacturers are now, more than ever, focused on (i) product differentiation, (ii) improvedinteraction with patients and (iii) creating a touch point for individual patient follow-up that could lead to improved therapy outcomes. The patient supportprograms include the direct fulfillment of the Sharps Recovery System to the pharmaceutical manufacturers’ program participants, which provides the propercontainment, return and treatment of the needles or injection devices utilized in therapy. Sharps’ proprietary SharpsTracer system tracks the return of theSharps Recovery System by the patient to the treatment facility and then makes available to the pharmaceutical manufacturer electronic data. This dataassists them in monitoring medication discipline and provides them with a touch point for individual patient follow-up, which potentially could lead tobetter outcomes. We believe the Company is the leader in providing solutions of this type to this market.We are positive about anticipated growth opportunities in the Retail market. According to the CDC, 38.5% of adults received a flu shot and 28.2% of flushots for adults were administered in a retail clinic. Over the flu seasons from 2011 to 2018, the Company saw growth in five years of 10% to 36% anddeclines in three years of 13% to 17%. Despite the volatility, Sharps believes the Retail market should continue to contribute to long-term growth for theCompany as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.Active Acquisition ProgramOver the past five years, the Company has developed a network of medical and hazardous waste service providers including those with route-based pickupservices, which allows the Company to serve the entire U.S. medical and hazardous waste market. In July 2015 and December 2015, the Company augmentedits network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania,Maryland, Ohio and other neighboring states. On July 1, 2016, the Company acquired another route-based pickup service which expanded service to NewYork and New Jersey and strengthened the Company’s position in the Northeast. Through a combination of acquisitions and organic growth, the Companynow offers route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. The Companydirectly serves more than 10,300 customer locations with route-based pickup services offered to areas encompassing over 50% of the U.S. population. Withthe addition of these route-based pickup regions and the network of medical and hazardous waste service providers serving the entire U.S., the Companyoffers clients a blended product portfolio to effectively target current and prospective customers with multi-site and multi-sized locations including thosethat generate larger quantities of medical and hazardous waste. The offering includes a single point of contact, consolidated billing, regulatory support andcomplete integration of our SharpsTracer system. The Company believes the comprehensive offering will continue to assist the Company in obtaining largeropportunities whereby the customer has both larger and smaller facilities generating medical waste, used healthcare materials and hazardous waste resultingin a more consistent and predictable revenue base for the Company.Improve product and service awareness to attract new customers.As we grow, we continue to focus additional marketing and sales efforts designed to educate professional offices, retail pharmacies and clinics, assisted livingand long-term care facilities, home healthcare, government, pharmaceutical manufacturers and other commercial organizations that require cost-effectiveservices for managing medical, pharmaceutical and hazardous waste of the benefits of our solution offerings and the need for safe, cost-effective andenvironmentally-friendly methods of waste treatment, including medical, pharmaceutical, and hazardous. We believe that the full-service nature of oursolution 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 weprovide. In addition to providing a convenient, cost-effective solution to waste and used healthcare materials treatment, we believe future growth will bedriven by the need for our customers to properly document and track the disposal of their waste to maintain11Table of Contentscompliance with new and existing legislation. We believe our understanding of the legislative process and focus on accurate and thorough electronictracking of waste disposal or treatment will provide substantial benefits to new customers looking to comply with new standards and promoteenvironmentally cleaner business practices.Enhance sales and marketing efforts.Over the past five years, the Company has made ongoing investments in sales and marketing initiatives to drive growth in two areas:•Web and Inside Sales — Through targeted telemarketing initiatives (inside sales), e-commerce driven website and web-based promotionalactivities, we believe we can drive significant additional growth as we increase awareness of the Company’s innovative solution offerings with afocus on individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-termcare facilities.•Field Sales – The field sales team focuses on larger dollar and nationwide opportunities in most of the markets served. The field sales team is ableto address larger opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensivewaste management offering.We have seen success with this approach over the past few years and believe the comprehensive offering capabilities will continue to accelerate revenuegrowth of the Company.CONCENTRATION OF CREDIT AND SUPPLIERSThere is an inherent concentration of credit risk associated with accounts receivable arising from sales to our major customers. For the fiscal year ended June30, 2018, one customer represented approximately 17% of revenue. This customer also represented approximately 13%, or $0.8 million, of the total accountsreceivable balance at June 30, 2018. For the fiscal year ended June 30, 2017, one customer represented approximately 17% of revenue and 10%, or $0.8million, of the total accounts receivable balance at June 30, 2017. For the fiscal year ended June 30, 2016, one customer represented approximately 17% ofrevenue. We may be adversely affected by our dependence on a limited number of high volume customers. Management believes that the risks are mitigatedby (i) the contractual relationships with key customers, (ii) the high quality and reputation of the Company and its solution offerings and (iii) the continueddiversification of our solution offerings into additional markets outside of our traditional customer base.We currently transport (from the patient or user to the Company’s facility or subcontracted treatment facilities) the majority of our solution offerings usingUSPS; therefore, any long-term interruption in USPS delivery services would disrupt the return transportation and treatment element of our business. Postaldelivery interruptions are rare. Additionally, since USPS employees are federal employees, such employees may be prohibited from engaging in orcontinuing a postal work stoppage, although there can be no assurance that such work stoppage can be avoided. We also have an arrangement with UPSwhereby UPS transports certain other solution offerings. The ability to ship items, whether through the USPS or UPS, is regulated by the government andrelated agencies. Any change in regulation restricting the shipping of medical waste, used healthcare materials or unused or expired dispensedpharmaceuticals 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 andsolutions. With respect to the Sharps Recovery System solutions, we own proprietary molds and dies and utilize several contract manufacturers for theproduction of the primary raw materials. We believe that alternative suitable contract manufacturers are readily available to meet the productionspecifications of our products and solutions. We utilize national suppliers for the majority of the raw materials used in our other products and solutions andinternational suppliers for Pitch-It IV Poles.INTELLECTUAL PROPERTYWe have a portfolio of trademarks and patents, both granted and pending. We consider our trademarks important in the marketing of our products andservices, including the Sharps logo, Sharps Recovery System, TakeAway Medication Recovery System, MedSafe, SharpsTracer, Sharps Secure, TakeAwayEnvironmental Return System, Complete Needle and PELLA-DRX™ among others. With respect to our registered marks, we continue using such marks andwill file all necessary documentation to maintain their registrations for the foreseeable future. We have a number of patents issued, including those applicableto 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 NeedleDisposal 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 & Disposal12Table of ContentsSystem (patent number US 4,463,106). We have patents pending on our MWMS rapid deployment system and our MedSafe solution.Solely for convenience, the trademarks and service marks referred to in this Annual Report on Form 10-K may appear without the ® or ™, but such referencesare not intended to indicate, in any way, that we will not assert to the fullest extent under applicable law our rights to such trademarks and service marks.COMPETITIONThere are several competitors who offer similar or identical products and services that facilitate the disposal of smaller quantities of medical waste. There arealso a number of companies that focus specifically on the marketing of products and services which facilitate disposal through transport by the USPS (similarto the Company’s products). These companies include (i) smaller private companies or (ii) divisions of larger companies. Additionally, we compete in certainmarkets with Stericycle, the largest medical waste company in the country, which focuses primarily on a pickup service business model. With the addition ofthe route-based pickup services offered on a direct basis covering over 50% of the U.S. population throughout the South, Southeast and Northeast andthrough a network of medical and hazardous waste services providers, the Company believes it is well positioned with its comprehensive medical wastemanagement offering to compete with Stericycle. As Sharps continues to grow and increase awareness of the proper disposal of syringes and unusedmedications (including controlled substances), it could face additional and possibly significant competition. We believe our comprehensive line of provensolution offerings, comprehensive medical waste management service offerings, first mover advantages, excellent industry reputation, significant history ofmarket and customer success, quality solutions and products, as well as our capabilities as a vertically-integrated producer of products and services providesignificant differentiation in the current competitive market.GOVERNMENT REGULATIONSharps is subject to extensive federal, state and/or local laws, rules and regulations. We are required to obtain permits, authorizations, approvals, certificatesand other types of governmental permission from the EPA, the Department of Transportation, the U.S. Food and Drug Administration, the State of Texas, theState of Pennsylvania and local governments with respect to our facilities and operations. Such laws, rules and regulations have been established to promoteoccupational safety and health standards and certain standards have been established in connection with the handling, transportation and disposal of certaintypes of medical and solid wastes, including transported medical waste. Our estimated annual costs of complying with these laws, regulations and guidelines,including environmental laws, is currently less than $200,000 per year. In the event additional laws, rules or regulations are adopted which affect ourbusiness, additional expenditures may be required in order for Sharps to be in compliance with such changing laws, rules and regulations.ITEM 1A. RISK FACTORSWe may be unable to manage our growth effectively.We continued to experience core revenue growth in fiscal year 2018 as we saw the benefits of our marketing activities in all of our target markets. Revenueincreased 5% to $40 million for the fiscal year ended June 30, 2018 driven by increases in the retail and professional markets due mainly to increased orderactivity for unused medication solutions, including the MedSafe, and targeted telemarketing initiatives and promotional activities. The increase in revenueand execution of our growth strategies has placed and will continue to place significant demands on our financial, operational and management resources. Inorder to continue our growth, we may need at some point to add operations, administrative and other personnel and to make additional investments in theinfrastructure 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 ouroperations and systems to the extent and in the time required.If the flu related business of our customers decreases, the revenues generated by our business could decrease.Our operating results are dependent in part upon the amount and types of solutions necessary to service our customers’ needs which are heavily influenced bythe total number of patients our customers are serving at any time, especially related to the administration of flu shots. At times of lower patient activity, ourcustomers have a decreased need for our services on a supplemental or peak needs basis. Our operating results can vary depending on the timing and severityof the flu season as well as other factors affecting the volume of flu shots administered in the retail setting.13Table of ContentsOur quarterly results may fluctuate significantly.Our operating results have historically varied on a quarterly basis and may continue to fluctuate significantly in the future. Factors that may affect ourquarterly operating results, some of which are beyond the control of management, include, but are not limited to, seasonality; the timing of inventory buildsfor patient support programs of our pharmaceutical manufacturer customers; the timing and severity of the flu season; fluctuations in inventory, energy,transportation, labor, healthcare and other costs; significant acquisitions, dispositions, joint ventures and other strategic initiatives; and many of the otherrisk factors discussed herein. Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful andinvestors should not rely on the results of any particular quarter as an indication of our future performance.Our business is dependent on a small number of customers. To the extent we are not successful in winning additional business mandates from ourgovernment and commercial customers or attracting new customers, our results of operations and financial condition would be adversely affected.We are dependent on a small group of customers. In addition, there is an inherent concentration of credit risk associated with accounts receivable arising fromsales to our major customers. For the fiscal year ended June 30, 2018, one customer represented approximately 17% of revenues. This customer alsorepresented approximately 13%, or $0.8 million, of the total accounts receivable balance as of June 30, 2018. To the extent significant customers aredelinquent or delayed in paying, or we are not successful in obtaining consistent and additional business from our existing and new customers, our results ofoperations and financial condition would be adversely affected.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 our senior management team consisting of theCompany’s CEO and President, Vice President and CFO, Vice President of Operations and Vice President of Marketing. We believe that the continuedsuccess of the business is largely dependent upon the continued employment of the senior management team and have, therefore, (i) entered into individualemployment arrangements with key personnel and (ii) approved the Compensation and Incentive Plan for participation by the senior management team inorder to provide an incentive for their continued employment with the Company. The unplanned loss of one or more members of the senior management teamand our inability to hire key employees could disrupt and adversely impact the Company’s ability to execute its business plan.Risks associated with our acquisition strategy could adversely affect our operating results.We expect a portion of our growth to come from acquisitions, and we continue to evaluate opportunities for acquiring businesses that may supplement ourinternal growth. However, there can be no assurance that we will be able to identify and purchase suitable operations. In addition, the success of anyacquisition depends in part on our ability to integrate the acquired business. The process of integrating acquired businesses may involve unforeseendifficulties and may require a disproportionate amount of management’s attention and the Company’s financial and other resources. There can be noassurance that any acquisitions, if completed, will be successful.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 arealso a number of companies that focus specifically on the marketing of products and services, which facilitate disposal through transport by the USPS (similarto the Company’s products). These companies include (i) smaller private companies or (ii) divisions of larger companies. Additionally, we compete in certainmarkets with Stericycle, the largest medical waste company in the country, which focuses primarily on a pickup service business model. As Sharps continuesto grow and increase awareness of the proper disposal of syringes and unused medications, it could face additional and possibly significant competition. As aresult, 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 reduceprices 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 volumecommitments. In general, customer purchase orders may be canceled and order volume levels can be14Table of Contentschanged or delayed with limited or no penalties. Canceled, delayed or reduced purchase orders could significantly affect our financial performance.The Company is subject to extensive and costly federal, state and local laws, and existing or future regulations may restrict the Company’s operations,increase our costs of operations and subject us to additional liability.We are subject to extensive federal, state and/or local laws, rules and regulations. We are required to obtain permits, authorizations, approvals, certificates andother types of governmental permission from the EPA, the Department of Transportation, the U.S. Food and Drug Administration, the State of Texas, the Stateof Pennsylvania and local governments with respect to our facilities and operations. Such laws, rules and regulations have been established to promoteoccupational safety and health standards and certain standards have been established in connection with the handling, transportation and disposal of certaintypes of medical and solid wastes, including transported medical waste. We believe that we are currently in compliance in all material respects with allapplicable laws and regulations governing our business, including the permits and authorizations for our incinerator facility. Our estimated annual costs ofcomplying with these laws, regulations and guidelines, including environmental laws, 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 changinglaws, rules and regulations. Furthermore, any material relaxation of any existing regulatory requirements governing the transportation and disposal ofmedical waste could result in a reduced demand for our products and services and could have a material adverse effect on our revenues and financialcondition. The scope and duration of existing and future regulations affecting the medical and solid waste disposal industry cannot be anticipated and aresubject to change.The inability of the Company to operate its treatment facilities would adversely affect its operationsOur business utilizes a treatment facility for the proper disposal or treatment of medical waste, used health care materials and unused pharmaceuticals. Ourowned facility has both incineration and autoclave technologies in Carthage, Texas. In August 2016, the Company received the Commonwealth ofPennsylvania Department of Environmental Protection Bureau of Waste Management permit for the processing of medical waste at its treatment facilitylocated in northeastern Pennsylvania. The 40,000 square foot facility has been permitted as both a medical waste treatment facility, using an autoclave, andas a transfer station for medical, pharmaceutical and trace chemotherapy waste of up to 82 tons per day. The facility is designed to cost-effectively andefficiently process medical waste generated by the Company’s route-based and mailback customers and also doubles as a distribution center of mailbacksolutions and has been in operation since November 2016. Sharps believes it operates and maintains the facilities in compliance in all material respects withall federal, state and local laws and/or any other regulatory agency requirements involving treatment and disposal and the operation of the incinerator andautoclave facilities. The failure to maintain the permits for the treatment facility or unfavorable conditions contained in the permits or new regulations couldsubstantially impair our operations and reduce our revenues. Any disruption in the availability of a disposal or treatment facility, whether as a result of actiontaken 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 aredesigned to minimize exposure to these materials, the possibility of accidents, leaks, spills and acts of God always exists. Examples of possible exposure tosuch materials include: truck accidents, damaged or leaking containers, improper storage of regulated waste by customers, improper placement by customersof materials into the waste stream that we are not authorized or able to process, such as certain body parts and tissues; or malfunctioning treatment plantequipment. Human beings, animals or property could be injured, sickened or damaged by exposure to regulated waste. This in turn could result in lawsuits inwhich we are found liable for such injuries, and substantial damages could be awarded against us. While we carry liability insurance intended to cover thesecontingencies, particular instances may occur that are not insured against or that are inadequately insured against. An uninsured or underinsured loss couldbe substantial and could impair our profitability and reduce our liquidity.Increases in transportation costs may adversely affect our business and results of operation.We maintain a transportation network and a fleet of transportation vehicles. A significant increase in market prices for trucks, fuel or driver wages couldadversely affect our business through higher transportation costs and reduce our operating margins and reported results of operations.15Table of ContentsRestrictions in our Credit Agreement could adversely affect our business, financial condition, results of operations and value of our securities.The Credit Agreement, as defined in Note 5 “Notes Payable and Long-Term Debt” in “Notes to the Consolidated Financial Statements,” contains affirmativeand negative covenants that, among other things, require the Company to maintain a maximum cash flow leverage ratio of no more than 3.0 to 1.0 and aminimum debt service coverage ratio of not less than 1.15 to 1.00. The Credit Agreement, which expires on March 29, 2021 for the working capital portion ofthe Credit Agreement, also contains customary events of default which, if uncured, may terminate the Credit Agreement and require immediate repayment ofall indebtedness to the lenders. The leverage ratio covenant may limit the amount available under the Credit Agreement. These covenants could affect ourability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise.Our ability to comply with the covenants and restrictions contained in the Credit Agreement may be affected by events beyond our control, includingprevailing economic, financial, and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants maybe impaired. A failure to comply with these provisions could result in a default or an event of default. Upon an event of default, unless waived, the lenderscould elect to terminate commitments, cease making further loans, require cash collateralization of letters of credit, cause its loans to become due and payablein full and force us into bankruptcy or liquidation. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and theholders of our stock could experience a partial or total loss of their investment.An inability to win additional government contracts could have a material adverse effect on our operations and adversely affect our future revenue.Although the Company has secured some U.S. government business during fiscal year 2018, there can be no assurances that future periods will includesimilar business. All contracts with, or subcontracts involving, the federal government are terminable or subject to renegotiation by the applicablegovernmental agency on 30 days notice at the option of the governmental agency. If a material contract is terminated or renegotiated in a manner that ismaterially 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 topenalties 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 avariety of other requirements relating to the formation, administration, performance and accounting of these contracts. Many of these contracts includeexpress 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 besuspended from government contracting or subcontracting. If one or more of our governmental contracts or subcontracts are terminated for any reason, or ifwe are suspended or barred from government work, we could suffer a significant reduction in expected revenues and profits. Furthermore, as a result of ourgovernmental contracts or subcontracts involving governmental facilities, claims for civil or criminal fraud may be brought by the government for violationsof 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 theCompany’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 or subcontracted treatment facilities) the majority of our solution offerings usingUSPS; therefore, any long-term interruption in USPS delivery services would disrupt the return transportation and treatment element of our business. Postaldelivery interruptions are rare. Additionally, since USPS employees are federal employees, such employees may be prohibited from engaging in orcontinuing a postal work stoppage, although there can be no assurance that such work stoppage can be avoided. As noted above, we entered into anarrangement with UPS whereby UPS transports certain other solution offerings. The ability to ship items, whether through the USPS or UPS, is regulated bythe government and related agencies. Any change in regulation restricting the shipping of medical waste, used healthcare materials or unused or expireddispensed pharmaceuticals through these channels would be detrimental to our ability to conduct operations. Any disruption in the transportation ofproducts would have an adverse effect on our operations, results of operations and financial condition.16Table of ContentsThe Company’s stock has experienced, and may continue to experience, low trading volume and price volatility.The Company’s common stock is quoted on the NASDAQ Capital Market (“NASDAQ”) under the symbol “SMED.” The daily trading volumes for ourcommon stock are, and may continue to be, relatively small compared to many other publicly traded securities. Over the past three years, the Company’scommon stock has had an average trading volume of approximately 37,000 shares traded per month. It may be difficult for investors to sell shares in thepublic market at any given time at prevailing prices, and the price of our common stock may, therefore, be volatile.We are subject to the reporting requirements of federal securities laws, and compliance with such requirements can be expensive and may divert resourcesfrom other projects, thus impairing our ability to grow.We are subject to the information and reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and otherfederal securities laws, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Act Wall Street Reformand Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The costs of preparing and filing annual and quarterly reports, proxy statements and otherinformation with the Securities and Exchange Commission and furnishing audited reports to stockholders will cause our expenses to be higher than theywould have been if we were privately held.It may be time consuming, difficult and costly for us to develop, implement and maintain the internal controls and reporting procedures required by theSarbanes-Oxley Act and the Dodd-Frank Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order todevelop and implement appropriate internal controls and reporting procedures. If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud.An inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our commonstock.Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or preventfraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation withinvestors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results ofoperation and access to capital. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.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 any policies and procedures may deteriorate.We may be subject to information technology system failures, network disruptions and breaches in data security.We rely upon sophisticated information technology systems, infrastructure and security procedures and systems to operate our business and ensure the securestorage and transmission of information. The size and complexity of our computer systems make them potentially vulnerable to breakdown, maliciousintrusion and random attack. Likewise, computer networks and the internet are, by nature, vulnerable to unauthorized access. An accidental or willful securitybreach could result in unauthorized access and/or use of sensitive data. Our security measures could be breached by third-party action, computer viruses,accidents or error or misconduct by an employee or contractor. Because techniques used to obtain unauthorized access, disable or degrade service or tosabotage computer systems change frequently, it may be difficult to detect immediately and we may be unable to implement adequate preventive measures.Unauthorized parties may also attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities,fraud, trickery or other means of deceiving employees, contractors and temporary staff. We have encountered threats of this type from time to time, none ofwhich have materially impacted our operations or financial results. Although we maintain a system of information security and controls, a party that is able tocircumvent our security measures could cause interruption in our operations, damage our computers or those of our users or otherwise damage our reputation.Depending on the severity, any of these events could adversely affect our operations and financial results. In addition, if we were to experience aninformation security breach, we may be required to expend significant amounts of time and money to remedy, protect against or mitigate the effect of thebreach, and we may not be able to remedy the situation in a timely manner, or at all. While we have invested in protection of data and informationtechnology, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.ITEM 1B. UNRESOLVED STAFF COMMENTSAs of the date of this report, we do not have any unresolved staff comments.17Table of ContentsITEM 2. PROPERTIESThe Company utilizes approximately 240,000 square feet of space across the U.S. including space for corporate offices in Houston, Texas. Sharps hasmanufacturing, assembly, storage, distribution and warehousing operations as well as two (2) fully-permitted facilities that house our processing andtreatment operations. Our processing and treatment facilities which, are located in Carthage, Texas and in Nesquehoning, Pennsylvania, are currentlypermitted to treat and process 182 tons of medical, pharmaceutical and other healthcare related waste per day. The Company owns one of these processingand treatment facilities and leases all other spaces. The leases expire between fiscal years 2019 to 2024 with options to renew ranging from 1 years to 5 years.ITEM 3. LEGAL PROCEEDINGSFrom time to time, the Company is involved in legal proceedings and litigation in the ordinary course of business. In the opinion of management, theoutcome of such matters is not anticipated to have a material adverse effect on the Company’s consolidated financial position or consolidated results ofoperations.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITYSECURITIESMarket Information: The Company’s common stock is quoted on the NASDAQ under the symbol “SMED”. Over the past three years, the Company’scommon stock has had an average trading volume of approximately 37,000 shares traded per month. The table below sets forth the high and low closingprices of the Company’s common stock on the NASDAQ for each quarter within the last two fiscal years. Common Stock High LowFiscal Year Ending June 30, 2017 First Quarter$5.84 $4.29Second Quarter$4.51 $3.40Third Quarter$4.86 $4.17Fourth Quarter$4.61 $4.00Fiscal Year Ending June 30, 2018 First Quarter$5.67 $4.17Second Quarter$4.94 $3.75Third Quarter$5.06 $3.96Fourth Quarter$4.75 $3.50Stockholders: At August 20, 2018, there were 16,082,021 shares of common stock held by approximately 147 holders of record; however, the Companybelieves the number of beneficial owners exceeds this number. The last reported sale of the common stock on August 20, 2018 was $3.27 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 cashgenerated from operations for working capital purposes and to fund the continued expansion of its business and does not anticipate paying any dividends onour common stock in the foreseeable future. Moreover, future payment of dividends may be restricted by credit or other agreements to which the Company isa party.Issuance of Common Shares for Lease: During the year ended June 30, 2018, the Company issued 20,617 shares of common stock as a portion ofconsideration for a third-party lease agreement. The shares were issued at $4.00 per share based on the closing price on the date of grant. This issuance wasexempt from registration pursuant to Section 4(a)(2) of the Securities Act. Non-cash expense recorded during the year ended June 30, 2018 was $37,000. Theremaining cost of $46,000 will be amortized over the life of the lease and is included in Prepaid and Other Current Assets or Other Assets on the balancesheet.18Table of ContentsSecurities Authorized for Issuance under Equity Compensation Plans:The following equity compensation plan information is provided as of June 30, 2018: Number ofsecurities tobe issued uponexerciseof outstandingoptions,warrants and rights Weighted averageexercise price ofoutstandingoptions, warrantsand rights Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in column (a))Plan Category(a) (b) (c)2010 Stock Plan as approved by shareholders (1) (2)933,153 $4.57 1,453,649Notes:(1) Represents stock options issued under the Sharps Compliance Corp. 2010 Stock Plan.(2) Number of securities to be issued and weighted average exercise price include the effect of 13,248 shares of restricted stock issued to the Board ofDirectors.ITEM 6. SELECTED FINANCIAL DATAThe following selected historical financial data has been derived from our audited financial statements and should be read in conjunction with the historicalConsolidated Financial Statements and related notes and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations(in thousands except earnings per share data): For the Year Ended June 30, 20182017201620152014Revenues$40,141$38,188$33,383$30,902$26,570Operating Income (Loss)$(577)$(1,187)$5$1,236$965Net Income (Loss)$(672)$(1,293)$13$1,160$956 Net Income (Loss) per share: Basic$(0.04)$(0.08)$0.00$0.08$0.06Diluted$(0.04)$(0.08)$0.00$0.07$0.06 Total Assets$33,231$34,464$30,147$29,751$26,461Total Debt$2,002$2,603$—$—$—Cash$5,155$4,675$12,435$15,157$13,717Working Capital$10,258$10,488$17,232$19,623$17,888Total Stockholders’ Equity$25,174$25,287$23,843$23,586$21,904Notes:•2014 Operating income and net income include $1.5 million for a legal settlement received by the Company.•2016 Revenues, operating income and net income include the results of operations for the acquisitions during the year which were not individually or inthe aggregate material to the Company’s financial position.•2017 Revenues, operating income and net income include the results of operations for the acquired business during the year. See Note 12 “Acquisitions”in "Notes to the Consolidated Financial Statements".ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing elsewherein this Annual Report on Form 10-K. See “Information Regarding Forward Looking Statements.”19Table of ContentsRESULTS OF OPERATIONSThe following analyzes changes in the consolidated operating results and financial condition of the Company during the years ended June 30, 2018, 2017and 2016, 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, 2018% 2017% 2016%Revenues$40,141100.0 % $38,188100.0 % $33,383100.0%Cost of revenues28,73971.6 % 26,35169.0 % 22,27266.7%Gross profit11,40228.4 % 11,83731.0 % 11,11133.3%SG&A expense11,16827.8 % 12,22332.0 % 10,81232.4%Depreciation and amortization8112.0 % 8012.1 % 2940.9%Operating income (loss)(577)(1.4)% (1,187)(3.1)% 50.0%Other income (expense)(74)(0.2)% (102)(0.3)% 320.1%Income (loss) before income taxes(651)(1.6)% (1,289) 37Income tax expense210.1 % 40.0 % 240.1%Net income (loss)$(672)(1.7)% $(1,293)(3.4)% $130.0%YEAR ENDED JUNE 30, 2018 AS COMPARED TO YEAR ENDED JUNE 30, 2017Total revenues for the fiscal year ended June 30, 2018 of $40.1 million increased by $2.0 million, or 5.1%, from the total revenues for the fiscal year endedJune 30, 2017 of $38.2 million. Billings by market are as follows (in thousands, unaudited): Year Ended June 30, 2018 2017 VarianceBILLINGS BY MARKET: Professional$13,110 $11,962 $1,148Home Health Care7,989 7,901 88Retail7,885 7,010 875Pharmaceutical Manufacturer4,482 5,961 (1,479)Assisted Living2,515 2,442 73Government2,074 1,680 394Environmental891 414 477Other818 763 55Subtotal39,76438,1331,631GAAP Adjustment *377 55 322Revenue Reported$40,141$38,188$1,953*Represents the net impact of the revenue recognition adjustments required to arrive at reported generally accepted accounting principles (“GAAP”)revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenueincludes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition ofcertain revenue associated with products returned for treatment and destruction and (iii) provisions for certain rebates, product returns and discounts tocustomers which are accounted for as reductions in sales in the same period the related sales are recorded. The difference between customer billings andGAAP revenue is reflected in the Company’s balance sheet as deferred revenue. See Note 2 “Summary of Significant Accounting Policies” in “Notes toConsolidated Financial Statements”.20Table of ContentsThe components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings, unaudited): Year Ended June 30, 2018 % Total 2017 % TotalBILLINGS BY SOLUTION: Mailbacks$21,409 53.8% $24,080 63.1%Route-based pickup services7,492 18.8% 6,348 16.6%Unused medications5,907 14.9% 3,377 8.9%Third party treatment services891 2.2% 413 1.1%Other (1)4,065 10.3% 3,915 10.3%Total billings$39,764 100.0% $38,133 100.0%GAAP adjustment (2)377 55 Revenue reported$40,141 $38,188 (1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.(2)Represents the net impact of the revenue recognition adjustments required to arrive at reported generally accepted accounting principles (“GAAP”)revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAPrevenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii)recognition of certain revenue associated with products returned for treatment and destruction and (iii) provisions for certain rebates, productreturns and discounts to customers which are accounted for as reductions in sales in the same period the related sales are recorded. The differencebetween customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.The increase in billings was primarily attributable to increased billings in the Professional ($1.1 million), Retail ($0.9 million), Environmental ($0.5 million)and Government ($0.4 million) markets. The increase was partially offset by decreased billings in the Pharmaceutical Manufacturer market ($1.5 million).The increase in Professional market billings is due to organic growth as the Company continued its focus on securing customers from the small to mediumquantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, who benefitfrom the cost-effective and convenient Sharps Recovery System and the Company’s route-based pickup services. The increase in Retail market billings wasdue mainly to increased order activity for unused medication solutions, including the MedSafe. The increase in Environmental market billings was due tohigher third party treatment billings from our treatment facilities in Texas and Pennsylvania. The increase in Government market billings was due primarilyto billings for unused medication related orders. The decrease in Pharmaceutical Manufacturer market billings was mainly due to timing of inventory buildsfor patient support programs. Billings for Mailbacks in the year ended June 30, 2018 decreased 11.1% to $21.4 million as compared to $24.1 million in 2017and represented 53.8% of total billings. Billings for Route-Based Pickup Services increased 18% to $7.5 million in the year ended June 30, 2018 due toorganic growth as compared to $6.3 million in 2017 and represented 18.8% of total billings. Billings for Unused Medications increased 75% to $5.9 millionin the year ended June 30, 2018 as compared to $3.4 million in 2017 and represented 14.9% of total billings.Cost of revenue for the year ended June 30, 2018 of $28.7 million was 71.6% of revenue. Cost of revenue for the year ended June 30, 2017 of $26.4 millionwas 69.0% of revenue. The lower gross margin for the year ended June 30, 2018 of 28.4% (versus 31.0% for the year ended June 30, 2017) was primarily dueto the unplanned second quarter 2018 repair and maintenance costs at both of the Company's treatment facilities, startup costs as a second shift was added tothe Pennsylvania plant, unplanned incremental costs associated with winter storms in the Northeast and the lower margin associated with the launch of a newunused medication program.Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2018 and 2017 were $11.2 million and $12.2 million, respectively. SG&Aexpenses for the year ended June 30, 2017 included $0.7 million of acquisition related costs associated with the completion of the Company’s acquisition ofCitiwaste. Without these acquisition related costs, SG&A decreased 3.0% compared to the prior year period due to the Company’s ongoing investment insales and marketing initiatives.The Company recorded an operating loss of $0.6 million for the year ended June 30, 2018 compared to an operating loss of $1.2 million for the year endedJune 30, 2017. The operating loss decreased mainly due to higher revenue and lower SG&A costs (discussed above).21Table of ContentsThe Company reported loss before income taxes of $0.7 million for the year ended June 30, 2018 compared to loss before income taxes of $1.3 million for theyear ended June 30, 2017. Loss before income taxes decreased decreased due to the change in operating loss (discussed above).The Company’s effective tax rate for the years ended June 30, 2018 and 2017 was (3.2)% and (0.3)%, respectively. The 2018 effective tax rate reflectsestimated state income tax expense of $29,000 offset by a federal benefit of $8,000. The federal benefit of $8,000 represents the net benefit of remeasuringthe deferred tax assets for recoverable alternative minimum tax credits pursuant to the 2017 tax reform in the amount of $245,000 offset by deferred taxliabilities related to indefinite lived assets, such as goodwill, in the amount of $237,000, which cannot be used as a source of future taxable income inevaluating the need for a valuation allowance against deferred tax assets. See Note 4 “Income Taxes” in “Notes to Consolidated Financial Statements” foradditional description of the 2017 tax reform and its impact on the Company.The Company reported a net loss of $0.7 million for the year ended June 30, 2018 compared to a net loss of $1.3 million for the year ended June 30, 2017.Net loss decreased due to the change in the operating loss (discussed above).YEAR ENDED JUNE 30, 2017 AS COMPARED TO YEAR ENDED JUNE 30, 2016Total revenues for the fiscal year ended June 30, 2017 of $38.2 million increased by $4.8 million, or 14%, from the total revenues for the fiscal year endedJune 30, 2016 of $33.4 million. Billings by market are as follows (in thousands, unaudited): Year Ended June 30, 2017 2016 VarianceBILLINGS BY MARKET: Professional$11,962 $7,571 $4,391Home Health Care7,901 7,378 523Retail7,010 8,798 (1,788)Pharmaceutical Manufacturer5,961 5,708 253Assisted Living2,442 2,194 248Government1,680 1,541 139Environmental414 259 155Other763 845 (82)Subtotal38,133 34,294 3,839GAAP Adjustment *55 (911) 966Revenue Reported$38,188 $33,383 $4,805*Represents the net impact of the revenue recognition adjustments required to arrive at reported generally accepted accounting principles (“GAAP”)revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenueincludes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition ofcertain revenue associated with products returned for treatment and destruction and (iii) provisions for certain rebates, product returns and discounts tocustomers which are accounted for as reductions in sales in the same period the related sales are recorded. The difference between customer billings andGAAP revenue is reflected in the Company’s balance sheet as deferred revenue. See Note 2 “Summary of Significant Accounting Policies” in “Notes toConsolidated Financial Statements”.22Table of ContentsThe components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings, unaudited): Year Ended June 30, 2017 % Total 2016 % TotalBILLINGS BY SOLUTION: Mailbacks$24,080 63.1% $24,654 71.9%Route-based pickup services6,348 16.6% 2,061 6.0%Unused medications3,377 8.9% 3,531 10.3%Third party treatment services413 1.1% 258 0.8%Other (1)3,915 10.3% 3,790 11.0%Total billings$38,133 100.0% $34,294 100.0%GAAP adjustment (2)55 (911) Revenue reported$38,188 $33,383 (1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.(2)Represents the net impact of the revenue recognition adjustments required to arrive at reported generally accepted accounting principles (“GAAP”)revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAPrevenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii)recognition of certain revenue associated with products returned for treatment and destruction and (iii) provisions for certain rebates, productreturns and discounts to customers which are accounted for as reductions in sales in the same period the related sales are recorded. The differencebetween customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.The increase in billings was primarily attributable to increased billings in the Professional ($4.4 million), Home Health Care ($0.5 million), PharmaceuticalManufacturer ($0.3 million) and Assisted Living ($0.2 million) markets. The increase was partially offset by decreased billings in the Retail market ($1.8million). The increase in Professional market billings is due to a combination of acquired and organic growth as the Company continued its focus on securingcustomers from the small to medium quantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and otherhealthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery System and the Company’s route-based pickup services. Of the$4.4 million increase in Professional billings, $3.1 million was generated from our acquired businesses based on their pre-acquisition run-rate with thedifference being attributable to organic growth. The increase in Home Health Care market billings is due to the timing of distributor purchases. The increasein Pharmaceutical Manufacturer market billings is primarily due to inventory builds for patient support programs. The increase in Assisted Living marketbillings is primarily a result of the increased sales focus as well as the Company’s route-based services. The decrease in Retail market billings was the result ofa decrease in billings for the TakeAway Medication Recovery System envelopes which were launched by several Retail customers in the prior year, a declinein overall flu shot related orders and the loss of one retail pharmacy customer. Billings for Mailbacks in the year ended June 30, 2017 decreased 2.3% to$24.1 million as compared to $24.7 million in 2016 and represented 63.1% of total billings. Billings for Route-Based Pickup Services increased 208% to$6.3 million in the year ended June 30, 2017 as compared to $2.1 million in 2016 and represented 16.6% of total billings. Of the $4.3 million increase inbillings for Route-Based Pickup Services, $3.1 million was generated from our acquired businesses based on their pre-acquisition run-rate with the differencebeing attributable to organic growth.Cost of revenue for the year ended June 30, 2017 of $26.4 million was 69.0% of revenue. Cost of revenue for the year ended June 30, 2016 of $22.3 millionwas 66.7% of revenue. The lower gross margin for the year ended June 30, 2017 of 31.0% (versus 33.3% for the year ended June 30, 2016) was primarily dueto the adverse impact of duplicative costs as the Company transitioned from third-party processing of medical waste in the Northeast Region to internalprocessing at the new facility in Pennsylvania.Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2017 and 2016 were $12.2 million and $10.8 million, respectively. SG&Aexpenses for the year ended June 30, 2017 included $0.7 million of acquisition related costs associated with the completion of the Company’s acquisition ofCitiwaste. Without these acquisition related costs and the $0.2 million of acquisition related costs incurred in the prior year, SG&A increased 8% comparedto the prior year period due to the Company’s ongoing investment in sales and marketing initiatives.23Table of ContentsThe Company recorded an operating loss of $1.2 million for the year ended June 30, 2017 compared to minimal operating income for the year ended June 30,2016. The operating loss was negatively impacted by lower gross profit and higher SG&A expense (discussed above).The Company reported loss before income taxes of $1.3 million for the year ended June 30, 2017 compared to minimal income before income taxes for theyear ended June 30, 2016. Loss before income taxes was negatively impacted by the operating loss (discussed above).The Company’s effective tax rate for the year ended June 30, 2017 and 2016 was (0.3%) and 64.9%, respectively, reflecting estimated state income taxes. TheCompany’s net deferred tax assets have been fully reserved by a valuation allowance.The Company reported a net loss of $1.3 million for the year ended June 30, 2017 compared to minimal net income for the year ended June 30, 2016. Net losswas negatively impacted by the net loss before income taxes (discussed above).PROSPECTS FOR THE FUTUREThe Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare facilities, pharmaceuticalmanufacturers, home healthcare providers, assisted living/long-term care, retail pharmacies and clinics, and the professional market which is comprised ofphysicians, dentists, surgery centers and veterinary practices. These markets require cost-effective services for managing medical, pharmaceutical andhazardous waste.The Company believes its growth opportunities are supported by the following:•A large professional market that consists of dentists, veterinarians, clinics, physician groups, urgent care facilities, ambulatory surgical centers andother healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous wastewhere we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from twodirections: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service alongwith our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on theindividual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-term carefacilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based serviceswhere the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing over 50% ofthe U.S. population.•In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions ofroute-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. In July 2016, the Companyacquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in theNortheast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a twenty-three (23)state region of the South, Southeast and Northeast portions of the United States. The Company directly serves more than 10,300 customer locationswith route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste serviceproviders servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sizedlocations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of salesopportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where boththe mailback and pickup service are integrated into the offering.•The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2012 Population Estimates and National Projections,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 long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, theCompany delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of eachfacility.•The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increasedpromotion of the Sharps Recovery System. According to the Centers for Disease Control ("CDC"), 38.5% of adults received a flu shot and 28.2% offlu shots for adults were administered in a retail clinic. Over the flu seasons from 2011 to 2018, the Company saw growth in five years of 10% to36% and declines in three years of 13% to 17%. Despite the volatility, Sharps believes the Retail market should continue to contribute to long-termgrowth for24Table of Contentsthe Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.•The passage of regulations for ultimate-user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway MedicationRecovery System envelopes) that meet the regulations for ultimate-user controlled substances disposal (Schedules II-V) to retail pharmacies.Additionally, with the new regulations, the Company is able to provide the MedSafe and TakeAway Medication Recovery Systems to assistedliving and hospice to address a long-standing issue within long-term care.•Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste — the Company’s SharpsRecovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings,schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to governmentagencies in need of proper and regulatory compliant medication disposal. The federal government, state agencies and non-profits are recognizingthe need to fund programs that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for proper medicationdisposal are being funded for prevention programs.•With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the SharpsRecovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensiveservices to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting,fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection& Disposal System, respectively.•A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unusedmedication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle DisposalSystem, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes.•The Company continually develops new solution offerings such as ultimate user medication disposal (MedSafe and TakeAway MedicationRecovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEAReverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers andother healthcare facilities (TakeAway Recycle System).•The Company’s strong financial position with a cash balance of $5.2 million, debt of $2.0 million and additional availability under the CreditAgreement.LIQUIDITY AND CAPITAL RESOURCESCash FlowCash flow has historically been primarily influenced by demand for products and services, operating margins and related working capital needs as well asmore strategic activities including acquisitions, stock repurchases and fixed asset additions. Cash increased by $0.5 million to $5.2 million at June 30, 2018from $4.7 million at June 30, 2017 due to the following:•Cash Flows used in Operating Activities - Working capital decreased by $0.2 million to $10.3 million at June 30, 2018 from $10.5 million at June 30,2017. The decrease is primarily attributed to an increase in cash offset by:•A decrease in accounts receivable of $1.2 million to $6.4 million at June 30, 2018 from $7.6 million at June 30, 2017 due to timing of billingsand collections,•A decrease in current deferred revenue of $0.5 million to $1.9 million at June 30, 2018 from $2.4 million at June 30, 2017 due to a decrease inrevenues for mailbacks partially offset by an increase in revenues for unused medications.•Cash Flows used in Investing Activities - Investing activities include capital expenditures of $1.2 million for normal plant and equipment additions.25Table of Contents•Cash Flows provided by Financing Activities – Financing activities include repayments of debt of $0.6 million.Off-Balance Sheet ArrangementsThe Company was not a party to any off-balance sheet transactions as defined in Item 303 of Regulation S-K.Credit FacilityOn March 29, 2017, the Company entered into to a credit agreement with a commercial bank which was subsequently amended on June 29, 2018 to extendthe maturity date by two years (“Credit Agreement”). The Credit Agreement, which replaced the Company’s prior credit agreement, provides for a $14.0million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and generalcorporate purposes and (ii) $8.0 million for acquisitions. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assetswith advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as defined in the CreditAgreement) equal to 80% of eligible accounts receivable plus the lesser of (i) 50% of eligible inventory and (ii) $3.0 million. Advances under the acquisitionportion of the credit facility are limited to 75% of the purchase price of an acquired company and convert to a five-year term note at the time of theborrowing. Borrowings bear interest at the greater of (a) zero percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5%. The LIBOR Marginmay increase to as high as 3.0% depending on the Company’s cash flow leverage ratio. The interest rate as of June 30, 2018 was approximately 4.63%. TheCompany pays a fee of 0.25% per annum on the unused amount of the credit facility. At June 30, 2018, $2.0 million was outstanding related to theacquisition portion of the credit facility. No amounts were outstanding under the working capital portion of the credit facility at June 30, 2018. There was$2.0 million outstanding under the acquisition portion of the credit facility at June 30, 2018.The Company has availability under the Credit Agreement of $12.0 million ($6.0 million for the working capital and $6.0 million for the acquisitions) as ofJune 30, 2018. The Company also has $40,000 in letters of credit outstanding as of June 30, 2018. The Company was in compliance with all the financialcovenants under the Credit Agreement as of June 30, 2018.The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flowleverage ratio of no more than 3.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The Credit Agreement, which expires onMarch 29, 2021 for the working capital portion of the Credit Agreement, also contains customary events of default which, if uncured, may terminate theCredit Agreement and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount available under theCredit Agreement.The Company utilizes performance bonds to support operations based on certain state requirements. At June 30, 2018, the Company had performance bondsoutstanding covering financial assurance up to $0.7 million.Management believes that the Company’s current cash resources (cash on hand and cash flows from operations) will be sufficient to fund operations for thetwelve months ending August 31, 2019 and beyond.Treatment FacilityThe Company’s treatment facility in Carthage, Texas is currently permitted to process 100 tons per day. The incinerator at the facility is currently permittedto treat 40 tons per day of municipal solid waste with 10% of this amount identified as applicable to healthcare facility generated medical waste.Approximately seven years ago, the Company supplemented the treatment facility’s existing incineration process with an autoclave system and technologycapable of treating up to eight tons per day of medical waste at the same facility. Autoclaving is a cost-effective alternative to traditional incineration thattreats medical waste with steam at high temperature and pressure to kill pathogens. The autoclave system is utilized alongside the incinerator for day-to-dayoperations. The autoclave system is not impacted by the EPA amended Clean Air Act (discussed below). We believe that our facility is one of only tenpermitted commercial facilities in the United States capable of treating all types of medical waste, used healthcare materials and unused or expired dispensedmedications (i.e., both incineration and autoclave capabilities).The Company also leases 45,480 square feet of space in Pennsylvania, including 40,000 square feet, which the Company utilizes as a fully-permitted facilityto house a treatment and distribution facility. The facility is permitted as both a medical waste treatment facility, utilizing an autoclave, and as a transferstation for medical, pharmaceutical and trace chemotherapy waste of up to 82 tons per day.CRITICAL ACCOUNTING POLICIESRevenue Recognition: The Company recognizes revenue when services are provided and from product sales when (i) goods are shipped or delivered and titleand risk of loss pass to the customer, (ii) the price is substantially fixed or determinable and (iii)26Table of Contentscollectability is reasonably assured except for those sales via multiple-deliverable arrangements. Provisions for certain rebates, product returns and discountsto 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 ofarrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimatedbased on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements whichinclude a vendor managed inventory ("VMI") program include terms that meet the “bill and hold” criteria and as such are recognized when the order iscompleted, at which point title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse.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 other solutions like the Takeaway Medication Recovery 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. For Mailbacks that are part of a VMI program, there isan additional element, or unit of measure, for outbound transportation. In accordance with the relative selling price methodology, an estimated selling priceis determined for all deliverables that qualify for separate units of accounting. The actual consideration received in a multiple-deliverable arrangement isthen allocated to the units based on their relative sales price. The selling price for the transportation revenue and the treatment revenue utilizes third partyevidence. The Company estimates the selling price of the compliance and container system based on the product and services provided includingcompliance with local, state and federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community as wellas storage and containment capabilities.Revenue for the sale of the compliance and container system is recognized upon delivery to the customer, at which time the customer takes title and assumesrisk of ownership. Transportation revenue is recognized when the customer returns the compliance and container system and the container has been receivedat the Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to theCompany’s owned or contracted facilities. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment havingbeen performed on the container. Since the transportation element and the treatment elements are undelivered services at the point of initial sale of thecompliance and container, transportation and treatment revenue is deferred until the services are performed. The current and long-term portions of deferredrevenues are determined through regression analysis and historical trends. Furthermore, through regression analysis of historical data, the Company hasdetermined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the transportation andtreatment elements are recognized at the point of sale.In May 2014 and as subsequently amended, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currentlyfollowed by the Company. See "Recently Issued Accounting Standards" in Note 2 “Summary of Significant Accounting Policies” in “Notes to ConsolidatedFinancial Statements” for more details about the impact of this new accounting standard.Business Combinations: The Company includes the results of operations of the businesses that are acquired as of the respective dates of acquisition. TheCompany allocates the fair value of the purchase price of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. TheCompany estimates and records the fair value of purchased intangible assets, which primarily consists of customer relationships, trade-names, and non-competes. The excess of the fair value of the purchase price over the fair values of these identifiable assets, both tangible and intangible, and liabilities isrecorded as goodwill.Income Taxes: Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities andare measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is establishedwhen 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 requiressignificant 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. A valuation allowance has been recorded toreduce 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 federaland state deferred tax assets related to net operating loss carryforwards and other tax attributes.The Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017, contains significant changes to U.S. Tax law, including lowering the U.S. corporate taxrate to 21% and repeal of the corporate alternative minimum tax for tax years beginning on or after January 1, 2018. Other provisions in the 2017 tax reformsuch as interest deductibility, changes to executive compensation plans, full expensing provisions for business assets, other new minimum taxes andinternational taxation modifications are not expected to have material implications to the Company's financial statements. The Company is required torecognize the impacts27Table of Contentsof the rate change on its deferred tax assets and liabilities in the period enacted. However, as the Company has a full valuation allowance on its net deferredtax asset, any deferred tax recognized due to the change in rate will be offset with a change in the valuation allowance. Therefore, there was no overall impactto the financial statements in the year ended June 30, 2018 due to this change in rate. However, the repeal of the corporate alternative minimum tax providesfor existing alternative minimum tax credit carryovers to be refunded beginning in 2018 and available to offset deferred tax liabilities related to indefinitelived assets as described below. As such, most of the valuation allowance in place at June 30, 2018 related to these credits has been released on a provisionalbasis and a deferred asset recorded for the expected benefit in future years. During the year ended June 30, 2018, the Company recorded an $8,000 deferredtax asset in Other Assets on the balance sheet, representing the net benefit of remeasuring its deferred tax assets for recoverable alternative minimum taxcredits pursuant to the 2017 tax reform in the amount of $245,000 offset by deferred tax liabilities related to indefinite lived assets, such as goodwill, in theamount of $237,000, which cannot be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets.The Company's gross deferred tax assets and the offsetting valuation allowance decreased on a provisional basis by approximately $0.7 million as a result ofthe reduction of the US. tax rate to 21%.Goodwill and Other Identifiable Intangible Assets: Finite-lived intangible assets are amortized over their respective estimated useful lives and evaluated forimpairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Goodwill isassessed for impairment at least annually. The Company generally performs its annual goodwill impairment analysis using a quantitative approach. Thequantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of our single reporting unit with itscarrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit’s goodwill is considered not to beimpaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. Theimpairment charge recognized is limited to the amount of goodwill present in our single reporting unit. These estimates and assumptions could have asignificant impact on whether or not an impairment charge is recognized and the amount of any such charge. The Company performs its annual impairmentassessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no impairment during the years ended June 30,2018, 2017 and 2016.RECENTLY ISSUED ACCOUNTING STANDARDSIn May 2014 and as subsequently amended, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currentlyfollowed 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 ofrevenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand thenature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a full retrospectiveapproach or a modified retrospective approach to implement the standard. The guidance is effective for annual reporting periods beginning after December15, 2017 (effective July 1, 2018 for the Company). The Company has substantially completed its analysis to evaluate the impact that the new accountingguidance will have on its consolidated financial statements and related disclosures which included identifying the material revenue streams and reviewing arepresentative sample of contracts. As a result of the analysis, the Company determined the following:•The transportation and treatment performance obligations related to the mail back and unused medication solutions, which were historicallyaccounted for as separate performance obligations, will be accounted for as a single performance obligation under the amended revenue recognitionguidance. The impact of this is not expected to be material.•Certain costs associated with obtaining long-term contracts with customers will be capitalized and amortized over the expected economic life of thecontract in future periods. The impact of this is not expected to be material.•The new guidance may change the timing of revenue recognition and related expense on certain of the Company’s vendor managed inventorycontracts. We are currently finalizing our analysis but expect the cumulative adjustment to be less than $0.4 million.The Company intends to adopt the standard using the modified retrospective approach, which involves retrospectively adopting the standard by recording acumulative effect adjustment to all uncompleted contracts at July 1, 2018.In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess oftwelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. Theprovisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), includinginterim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact of the newguidance on its consolidated28Table of Contentsfinancial statements and related disclosures as well as evaluating the available transition methods. The Company will continue to evaluate the standard aswell as additional changes, modifications or interpretations which may impact the Company.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe consolidated financial statements of the Company and the notes thereto, and the related reports of the Company’s independent registered publicaccounting firms thereon are referenced as pages F-1 to F-21 and are included herein by reference.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.None.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresThe Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensurethat information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified inthe SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) andChief 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 disclosurecontrols and procedures (“Disclosure Controls”) as of June 30, 2018 pursuant to Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based on thisEvaluation, the CEO and CFO concluded that our Disclosure Controls were effective as of June 30, 2018.Changes in Internal ControlsDuring the quarter ended June 30, 2018, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financialreporting.Management’s Report on Internal Control over Financial ReportingThe Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inExchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assuranceto our management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposesin 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 asnecessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receiptsand expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company and (iii) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have amaterial 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 matterhow well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, eveneffective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that thedegree 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, 2018. In making thisassessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-IntegratedFramework (2013) . Based on the assessment, the Company’s management concluded that, as of June 30, 2018, the Company’s internal control over financialreporting was effective based on those criteria.29Table of ContentsITEM 9B. OTHER INFORMATIONNone.PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation14A with the SEC relating to its Annual Meeting of Stockholders to be held on November 15, 2018.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation14A with the SEC, relating to its Annual Meeting of Stockholders to be held on November 15, 2018.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation14A with the SEC, relating to its Annual Meeting of Stockholders to be held on November 15, 2018.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation14A with the SEC, relating to its Annual Meeting of Stockholders to be held on November 15, 2018.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation14A with the SEC relating to its Annual Meeting of Stockholders to be held on November 15, 2018.30Table of ContentsPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESExhibitNumberDescription of Exhibit2.1Agreement for Purchase and Sale of LLC Units dated July 1, 2016 by and between Sharps Compliance, Inc. and Citiwaste, LLC (incorporated byreference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on July 6, 2016).3.1Amended and Restated Certificate of Incorporation of U.S. Medical Systems, Inc. (incorporated by reference from Exhibit 3.5 to the Registrant’sTransition Report on Form 10KSB40 (File No. 000-22390; Film No. 98716804), filed on September 29, 1998).3.2Certificate of Elimination of the Series A 10% Voting Convertible Preferred Stock of Sharps Compliance Corp. (incorporated by reference fromExhibit 3.6 to Form 10KSB40 (File No. 000-22390; Film No. 98716804), filed September 29, 1998).3.3Amended and Restated Bylaws of Sharps Compliance Corp dated May 23, 1994 (incorporated by reference to Exhibit 3.2 to Form 8-K, filedNovember 19, 2010).4.1Specimen Stock Certificate (incorporated by reference from Exhibit 4.4 to Form 10KSB40 (File No. 000-22390; Film No. 98716804), filedSeptember 29, 1998).10.1Form of Restricted Stock Award Agreement dated June 9, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K (File No. 000-22390; Film No. 08888237), filed June 9, 2008).*10.2Sharps Compliance Corp. 2010 Stock Plan dated November 22, 2010 (incorporated by reference to Exhibit A of the Registrant’s ProxyStatement on Schedule 14A, filed October 12, 2010).*10.3Lease 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 (File No. 000-22390; Film No. 06962703), filed July14, 2006).10.4Lease 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 Form8-K (File No. 000-22390; Film No. 06962703), filed July 14, 2006).10.5Second 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 (File No. 001-34269; Film No. 10667451), filedMarch 9, 2010).10.6Third Amendment to Lease Agreement dated February 6, 2015, between Sharps Compliance, Inc. and Warehouse Associates Corporate CentreKirby II, Ltd. (incorporated by reference to 10.1 to the Registrant’s Current Report on Form 8-K, filed on February 17, 2015).10.7Fourth Amendment to Lease Agreement dated August 5, 2015, between Sharps Compliance Inc. and Warehouse Associates Corporate CentreKirby IV, Ltd. (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K, filed on August 26, 2015).10.8Lease Agreement dated as of January 30, 2009, between Sharps Compliance, Inc. and Park 288 Industrial, LLC (incorporated by reference toExhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-22390; Film No. 09565104), filed February 3, 2009).10.9Amended Lease Agreement dated as of May 27, 2009, between Sharps Compliance, Inc. and Park 288 Industrial, LLC (incorporated by referenceto Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-24269; Film No. 09866215), filed June 2, 2009).10.10Fourth Amendment to Lease Agreement dated June 24, 2014, between Sharps Compliance, Inc. of Texas and Park 288 Industrial, L.L.C.(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on June 24, 2014).10.11Lease Agreement dated as of October 7, 2015, between Sharps Compliance, Inc. and Alpha Bio-Med Services LLC (incorporated by reference toExhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 9, 2015).10.12Loan Agreement dated March 29, 2017, by and between Sharps Compliance, Inc. of Texas and a commercial bank (incorporated by reference toExhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on April 3, 2017).10.13Executive Employment Agreement Amendment by and between Sharps Compliance Corp. and David P. Tusa dated June 14, 2010 (incorporatedby reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-34269; Film No. 10893750), filed June 14, 2010). *31Table of Contents10.14Executive Employment Agreement Amendment between Sharps Compliance Corp. and David P. Tusa dated March 6, 2012 (incorporated byreference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed March 7, 2012).*10.15Executive Employment Agreement Amendment by and between Sharps Compliance Corp. and David P. Tusa dated September 10, 2015(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed September 11, 2015).*10.16Employment Agreement by and between Sharps Compliance Corp. and Diana P. Diaz dated June 14, 2010 (incorporated by reference toExhibit 10.3 to the Registrant’s Current Report on Form 8-K(File No. 001-34269; Film No. 10893750), filed June 14, 2010).*10.17Executive Employment Agreement Amendment between Sharps Compliance Corp. and Diana P. Diaz dated March 6, 2012 (incorporated byreference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed March 7, 2012).*10.18Executive Employment Agreement Amendment by and between Sharps Compliance Corp. and Diana P. Diaz dated September 10, 2015(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed September 11, 2015).*10.19Employment Agreement by and between Sharps Compliance, Inc. and Gregory C. Davis dated May 18, 2011 (incorporated by reference toExhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-34269; Film No. 11866772), filed May 24, 2011).*10.20Lease between SIT Realty LLC and Sharps Compliance, Inc., dated as of September 28, 2016 (incorporated by reference to Exhibit 10.1 to theRegistrant’s Current Report on Form 8-K filed October 3, 2016).10.21First Modification to Loan Agreement dated June 29, 2018, by and between Sharps Compliance Inc. of Texas and a commercial bank (filedherewith).21.1Subsidiaries of Sharps Compliance Corp. (filed herewith).23.1Consent of BDO USA, LLP (filed herewith).31.1Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act (filed herewith).31.2Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act (filed herewith).32.1Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act (filed herewith).32.2Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act (filed herewith).101.INSXBRL Instance Document (filed herewith)101.SCHXBRL Taxonomy Extension Schema Document (filed herewith)101.CALXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)101.DEFXBRL Taxonomy Extension Linkbase Document (filed herewith)101.LABXBRL Taxonomy Extension Label Linkbase Document (filed herewith)101.PREXBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)*This exhibit is a management contract or a compensatory plan or arrangement.ITEM 16. FORM 10-K SUMMARYNone.32Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.SHARPS COMPLIANCE CORP.Dated: August 22, 2018By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated.Dated: August 22, 2018By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer) Dated: August 22, 2018By: /s/ DIANA P. DIAZ Diana P. Diaz Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: August 22, 2018By: /s/ F. GARDNER PARKER F. Gardner Parker Director Dated: August 22, 2018By: /s/ JOHN W. DALTON John W. Dalton Director Dated: August 22, 2018By: /s/ PARRIS H. HOLMES Parris H. Holmes Director Dated: August 22, 2018By: /s/ PHILIP C. ZERRILLO Philip C. Zerrillo Chairman of the Board Of Directors33Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED FINANCIAL STATEMENTSPAGE Report of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of June 30, 2018 and 2017F-3Consolidated Statements of Operations for the Years Ended June 30, 2018, 2017 and 2016F-4Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2018, 2017 and 2016F-5Consolidated Statements of Cash Flows for the Years Ended June 30, 2018, 2017 and 2016F-6Notes to Consolidated Financial StatementsF-7F-1Table of ContentsReport of Independent Registered Public Accounting FirmShareholders and Board of DirectorsSharps Compliance Corp.Houston, TexasOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of Sharps Compliance Corp. and subsidiaries (collectively, the “Company) as of June 30,2018 and 2017, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period endedJune 30, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statementspresent fairly, in all material respects, the financial position of the Company and subsidiaries at June 30, 2018 and 2017, and the results of their operationsand their cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the UnitedStates of America.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required tohave, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain anunderstanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ BDO USA, LLPWe have served as the Company's auditor since 2014.Houston, TexasAugust 22, 2018F-2Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share and par value amounts) June 30, 2018 2017ASSETS CURRENT ASSETS Cash$5,155 $4,675Accounts receivable, net6,370 7,553Inventory3,986 4,098Prepaids and other current assets739 694TOTAL CURRENT ASSETS16,250 17,020PROPERTY, PLANT AND EQUIPMENT, net6,572 6,543OTHER ASSETS149 120GOODWILL6,735 6,735INTANGIBLE ASSETS, net3,525 4,046TOTAL ASSETS$33,231 $34,464LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable$1,500 $1,710Accrued liabilities2,061 1,800Current maturities of long-term debt537 601Deferred revenue1,894 2,421TOTAL CURRENT LIABILITIES5,992 6,532LONG-TERM DEFERRED REVENUE, net of current portion470 478OTHER LONG-TERM LIABILITIES130 165LONG-TERM DEBT, net of current portion1,465 2,002TOTAL LIABILITIES8,057 9,177COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS’ EQUITY Common stock, $0.01 par value per share; 20,000,000 shares authorized; 16,377,636 and 16,304,027 sharesissued, respectively and 16,082,021 and 16,008,412 shares outstanding, respectively164 163Treasury stock, at cost, 295,615 shares repurchased(1,554) (1,554)Additional paid-in capital28,621 28,063Accumulated deficit(2,057) (1,385)TOTAL STOCKHOLDERS’ EQUITY25,174 25,287TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$33,231 $34,464See accompanying notes to consolidated financial statementsF-3Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per-share data) Year Ended June 30, 2018 2017 2016REVENUES$40,141 $38,188 $33,383Cost of revenues28,739 26,351 22,272GROSS PROFIT11,402 11,837 11,111Selling, general and administrative11,168 12,223 10,812Depreciation and amortization811 801 294OPERATING INCOME (LOSS)(577) (1,187) 5OTHER INCOME (EXPENSE) Interest income20 13 32Interest expense(94) (115) —TOTAL OTHER INCOME (EXPENSE)(74) (102) 32INCOME (LOSS) BEFORE INCOME TAXES(651) (1,289) 37INCOME TAX EXPENSE Current29 4 24Deferred(8) — —TOTAL INCOME TAX EXPENSE21 4 24NET INCOME (LOSS)$(672) $(1,293) $13NET INCOME (LOSS) PER COMMON SHARE Basic and Diluted$(0.04) $(0.08) $0.00WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PERCOMMON SHARE: Basic16,055 15,949 15,448Diluted16,055 15,949 15,838See accompanying notes to consolidated financial statementsF-4Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share data) Common Stock Treasury Stock Shares Amount Shares Amount Additional Paid-in Capital AccumulatedDeficit TotalStockholders’EquityBalances, June 30, 2015 15,575,041 $156 (191,250) $(809) $24,344 $(105) $23,586Exercise of stock options 112,425 1 — — 312 — 313Stock-based compensation — — — — 676 — 676Issuance of restricted stock 52,992 1 — — (1) — —Shares repurchased — — (104,365) (745) — — (745)Net income — — — — — 13 13Balances, June 30, 2016 15,740,458 158 (295,615) (1,554) 25,331 (92) 23,843Exercise of stock options 95,050 1 — — 341 — 342Stock-based compensation — — — — 496 — 496Issuance of common shares for acquisition 415,527 4 — — 1,895 — 1,899Issuance of restricted stock 52,992 — — — — — —Net loss — — — — — (1,293) (1,293)Balances, June 30, 2017 16,304,027 163 (295,615) (1,554) 28,063 (1,385) 25,287Stock-based compensation — — — — 476 — 476Issuance of common shares for lease 20,617 — — — 83 — 83Issuance of restricted stock 52,992 1 — — (1) — —Net loss — — — — — (672) (672)Balances, June 30, 2018 16,377,636 $164 (295,615) $(1,554) $28,621 $(2,057) $25,174See accompanying notes to consolidated financial statementsF-5Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended June 30, 2018 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)$(672) $(1,293) $13 Adjustments to reconcile net income (loss) to net cash provided by (used in) operatingactivities: Depreciation and amortization1,561 1,485 816 Bad debt expense62 20 34 Non-cash lease expense37 — — Loss on inventory write-down— — 17 Loss on disposal of property, plant and equipment13 10 — Stock-based compensation expense476 496 676 Deferred tax benefit(8) — — Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable1,121 (1,264) 892 Inventory305 (61) (1,055) Prepaid and other assets(20) (35) (46) Accounts payable and accrued liabilities29 125 (759) Deferred revenue(535) (61) 600 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES2,369 (578) 1,188 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment(1,212) (2,486) (1,926) Cash proceeds from sale of property, plant and equipment10 23 — Additions to intangible assets(86) (163) — Payments for business acquisitions, net of cash acquired— (7,314) (1,552) NET CASH USED IN INVESTING ACTIVITIES(1,288) (9,940) (3,478) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options— 342 313 Repayments of long-term debt(601) (3,184) — Proceeds from long-term debt— 5,600 — Shares repurchased— — (745) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES(601) 2,758 (432) NET INCREASE (DECREASE) IN CASH480 (7,760) (2,722) CASH, beginning of year4,675 12,435 15,157 CASH, end of year$5,155 $4,675 $12,435 SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid$3 $9 $152 Interest paid on long-term debt$87 $107 $— NON-CASH INVESTING ACTIVITIES: Issuance of common stock for acquisition$— $1,899 $— Issuance of common stock for lease$83 $— $— Unpaid consideration related to acquisitions$— $— $181 Transfer of equipment to inventory$193 $118 $143 Property, plant and equipment financed through accounts payable$(13) $28 $—See accompanying notes to consolidated financial statementsF-6Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016NOTE 1 - ORGANIZATION AND BACKGROUNDOrganization: The accompanying consolidated financial statements include the financial transactions and accounts of Sharps Compliance Corp. and itswholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.), Sharps e-Tools.com Inc. (“Sharps e-Tools”), SharpsManufacturing, Inc., Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.), Sharps Safety, Inc., Alpha Bio/Med ServicesLLC, Bio-Team Mobile LLC and Citiwaste, LLC (collectively, “Sharps” or the “Company”). All significant intercompany accounts and transactions havebeen eliminated upon consolidation.Business: Sharps is a leading full-service national provider of comprehensive waste management services including medial, pharmaceutical and hazardousfor small and medium quantity generators. The Company’s solutions include Sharps Recovery System™ (formerly Sharps Disposal by Mail System®),TakeAway Medication Recovery System™, MedSafe®, TakeAway Recycle System™, ComplianceTRACSM, SharpsTracer®, Sharps Secure® Needle DisposalSystem, Complete Needle™ Collection & Disposal System, TakeAway Environmental Return System™, Pitch-It IV™ Poles, Asset Return System and SpillKit and Recovery System . The Company also offers route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeastportions of the United States.Concentration of Customers and Service Providers: There is an inherent concentration of credit risk associated with accounts receivable arising from sales tomajor customers. For the fiscal year ended June 30, 2018, one customer represented approximately 17% of revenues. This customer also representedapproximately 13%, or $0.8 million, of the total accounts receivable balance as of June 30, 2018. For the fiscal year ended June 30, 2017, one customerrepresented approximately 17% of revenues and 10%, or $0.8 million, of the total accounts receivable balance as of June 30, 2017. For the fiscal year endedJune 30, 2016, one customer represented approximately 17% of revenues. The Company may be adversely affected by its dependence on a limited number ofhigh volume customers.Currently, the majority of Sharps transportation is sourced with the United States Postal Service (“USPS”), which consists of delivering the Sharps RecoverySystem from the end user to the Company’s facilities. The Company also has an arrangement with United Parcel Service Inc. (“UPS”) whereby UPS transportscertain of the Company’s products from the end user to the Company’s facilities. Sharps maintains relationships with multiple raw materials suppliers andvendors in order to meet customer demands and assure availability of our products and solutions. With respect to the Sharps Recovery System solutions, theCompany owns proprietary molds and dies and utilizes several contract manufacturers for the production of the primary raw materials. Sharps believes thatalternative suitable contract manufacturers are readily available to meet the production specifications of our products and solutions. The Company utilizesnational suppliers for the majority of the raw materials used in our other products and solutions and international suppliers for Pitch-It IV Poles.NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESRevenue Recognition: The Company recognizes revenue, net of applicable sales tax, when services are provided and from product sales when (i) goods areshipped or delivered, and title and risk of loss pass to the customer, (ii) the price is substantially fixed or determinable and (iii) collectability is reasonablyassured except for those sales via multiple-deliverable revenue arrangements. Provisions for certain rebates, product returns and discounts to customers areaccounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements withdirect, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based oncontractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements which include avendor managed inventory ("VMI") program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed, atwhich point title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse. During the fiscal years endedJune 30, 2018, 2017 and 2016, the Company recorded revenue from inventory builds that are held in vendor managed inventory under these serviceagreements of $2.4 million, $3.4 million and $3.2 million, respectively. As of June 30, 2018 and 2017, $2.1 million and $2.7 million, respectively, ofsolutions sold through that date were held in vendor managed inventory pending fulfillment or shipment to patients of pharmaceutical manufacturers whooffer these solutions to patients in an ongoing patient support program.Certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery Systemand various other solutions like the TakeAway Medication Recovery Systems referred to as “Mailbacks” and Sharps Pump and Asset Return Systems, referredto 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. For Mailbacks that are part of a VMI program, there is an additional element, or unit of measure, foroutbound transportation.F-7Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016In accordance with the relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for separate units ofaccounting. The actual consideration received in a multiple-deliverable arrangement is then allocated to the units based on their relative sales price. Theselling price for the transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of thecompliance and container system based on the product and services provided, including compliance with local, state and federal laws, adherence to stringentmanufacturing 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 system is recognized upon delivery to the customer, at which time the customer takes title and assumesrisk of ownership. Transportation revenue is recognized when the customer returns the compliance and container system and the container has been receivedat the Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to theCompany’s owned or contracted facilities. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment havingbeen performed on the container. Since the transportation element and the treatment elements are undelivered services at the point of initial sale of thecompliance and container, transportation and treatment revenue is deferred until the services are performed. The current and long-term portions of deferredrevenues are determined through regression analysis and historical trends. Furthermore, through regression analysis of historical data, the Company hasdetermined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the transportation andtreatment elements are recognized at the point of sale.In May 2014 and as subsequently amended, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currentlyfollowed by the Company. See "Recently Issued Accounting Standards" as follows for more details about the impact of this new accounting standard.Business Combinations: The Company includes the results of operations of the businesses that are acquired as of the respective dates of acquisition. TheCompany allocates the fair value of the purchase price of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. TheCompany estimates and records the fair value of purchased intangible assets, which primarily consists of customer relationships, trade-names, and non-competes. The excess of the fair value of the purchase price over the fair values of these identifiable assets, both tangible and intangible, and liabilities isrecorded as goodwill.Income Taxes: Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities andare measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is establishedwhen it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requiressignificant 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. A valuation allowance has been recorded toreduce the Company’s deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization ofcertain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.The Company is subject to income taxes in the United States and in numerous state tax jurisdictions. Significant judgment is required in evaluating theCompany’s tax positions and determining its provision for income taxes. The Company accounts for uncertain tax positions in accordance with FASB ASC740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before beingrecognized in the financial statements. The Company has not recognized any material uncertain tax positions for the years ended June 30, 2018, 2017 and2016. 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, 2015 and after•State of Texas – fiscal years ended June 30, 2013 and after•State of Georgia – fiscal years ended June 30, 2015 and after•State of Pennsylvania – fiscal years ended June 30, 2015 and after•Other States – fiscal years ended June 30, 2014 and afterNone of the Company’s federal or state tax returns are currently under examination. The Company records income tax related interest and penalties, ifapplicable, as a component of the provision for income tax expense. However, there were no such amounts recognized in the consolidated statements ofoperations in 2018, 2017 and 2016.Accounts Receivable: Accounts receivable consist primarily of amounts due to the Company from normal business activities. Accounts receivable balancesare determined to be delinquent when the amount is past due based on the contractual terms withF-8Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016the customer. The Company maintains an allowance for doubtful accounts to reflect the likelihood of not collecting certain accounts receivable based onpast collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accountswhen the Company determines that the receivable will not be collected and/or when the account has been referred to a third-party collection agency. TheCompany has a history of minimal uncollectible accounts. See rollforward of allowance activity below:Allowance for DoubtfulAccounts BalanceBeginningof Year Charges toExpense Write-offs/Recoveries Balance Endof Year 2018 $78 $62 $(38) $1022017 $63 $20 $(5) $782016 $34 $34 $(5) $63Stock-Based Compensation: Stock-based compensation cost for options and restricted stock awarded to employees and directors is measured at the grantdate, based on the calculated fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of theequity grant). Total stock-based compensation expense for the fiscal years ended June 30, 2018, 2017 and 2016 are as follows: Year Ended June 30, 2018 2017 2016Stock-based compensation expense included in: Cost of revenue$43 $41 $31Selling, general and administrative433 455 645Total$476 $496 $676The Company estimates the fair value of restricted stock awards based on the closing price of the Company’s common stock on the date of the grant. TheCompany estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stockoptions 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, therisk 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 fair value of the Company’s stock options was estimated on the grant date using the Black-Scholes option-pricing model with the followingassumptions: Year Ended June 30, 2018 2017 2016Weighted average risk-free interest rate1.2% 1.1% 1.0%Weighted average expected volatility48% 47% 45%Weighted average expected life (in years)3.03 5.15 4.56Dividend yield— — —The Company considers an estimated forfeiture rate for stock options based on historical experience and the anticipated forfeiture rates during the futurecontract life.Cash: 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 hasnot experienced any losses in such accounts.Inventory: Inventory consists primarily of raw materials and finished goods held for sale and are stated at the lower of cost or net realizable value using theaverage cost method. The Company periodically reviews the value and classification of items in inventory and provides write-downs or write-offs ofinventory based on its assessment of physical deterioration, obsolescence, changes inF-9Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016price levels and other causes. At June 30, 2018, total inventory was $4.0 million of which $2.7 million was finished goods, and $1.3 million was rawmaterials. At June 30, 2017, total inventory was $4.1 million of which $2.8 million was finished goods, and $1.3 million was raw materials. There were nowrite-downs of inventory for the fiscal years ended June 30, 2018 and 2017. Total write-downs for the fiscal year ended June 30, 2016 were $17,000 and wereincluded in cost of goods sold.Property, Plant and Equipment: Property, plant and equipment, including third party software and implementation costs, is stated at cost less accumulateddepreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets. Additions, improvements andrenewals significantly adding to the asset value or extending the life of the asset are capitalized. Ordinary maintenance and repairs, which do not extend thephysical or economic life of the property or equipment, are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost andrelated 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 ofmaterials 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 maintenancecosts associated with system changes or internal-use software are expensed as incurred. Additionally, the costs of data cleansing, reconciliation, balancing ofold data to the new system, creation of new/additional data and data conversion costs are expensed as incurred.Goodwill and Other Identifiable Intangible Assets: Finite-lived intangible assets are amortized over their respective estimated useful lives and evaluated forimpairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Goodwill isassessed for impairment at least annually. The Company generally performs its annual goodwill impairment analysis using a quantitative approach. Thequantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of our single reporting unit with itscarrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit’s goodwill is considered not to beimpaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. Theimpairment charge recognized is limited to the amount of goodwill present in our single reporting unit. These estimates and assumptions could have asignificant impact on whether or not an impairment charge is recognized and the amount of any such charge. The Company performs its annual impairmentassessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no impairment during the years ended June 30,2018, 2017 and 2016.Intangible Assets: Intangible assets consist of (i) acquired customer relationships, (ii) permit costs related to the Company’s treatment facilities and transferstations, and (iii) eleven patents (two acquired in June 1998, one in November 2003, one in January 2012, two in April 2012, one in August 2012, one inSeptember 2012, one in December 2012, one in November 2013 and one in January 2014), and (iv) defense costs related to certain existing patents.Accrued Liabilities: The components of Accrued Liabilities on the balance sheet as of June 30, 2018 and 2017 are as follows: As of June 30, 2018 2017Accrued payroll$389 $322Customer-related payables334 226Accrued rebates327 297Other1,011 955Total$2,061 $1,800Shipping and Handling Fees and Costs: The Company records amounts billed to customers for shipping and handling as revenue. Costs incurred by theCompany 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 otherproduct related costs as cost of revenues.Advertising Costs: Advertising costs are charged to expenses when incurred and totaled $0.7 million, $0.8 million and $0.6 million for the fiscal years endedJune 30, 2018, 2017 and 2016, respectively.F-10Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016Research and Development Costs: Research and development costs are charged to expense when incurred. Research activities represent an important part ofthe Company’s business and include both internal labor costs and payments to third parties related to the processes of discovering, testing and developingnew products, improving existing products, as well as demonstrating product efficacy and regulatory compliance prior to launch of new products andservices. Research and development expenses paid to third parties totaled less than $0.1 million for each of the fiscal years ended June 30, 2018, 2017 and2016.Realization of Long-lived Assets: The Company evaluates the recoverability of property, plant and equipment and intangible or other assets if facts andcircumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated withthe asset are compared to the asset’s carrying amount to determine if a write-down to fair value is necessary. No impairment loss was recognized during theyears ended June 30, 2018, 2017 and 2016.Employee Benefit Plans: In addition to group health-related benefits, the Company maintains a 401(k) employee savings plan available to all full-timeemployees. The Company matches a portion of employee contributions with cash (25% of employee contribution up to 6%). Company contributions to the401(k) plan were less than $0.1 million in each of the fiscal years ended June 30, 2018, 2017 and 2016, respectively and are included in selling, general andadministrative expenses. For purposes of the group health benefit plan and beginning February 1, 2016, the Company self-insures an amount equal to theexcess of the employees’ deductible (range from $2,500 for each individual and family member covered) up to the amount by which the third-party insurancecoverage begins (ranges from $2,500 for individual up to $10,000 for family coverage). The amount of liability at June 30, 2018 and 2017 was less than $0.1million and is included in accrued liabilities. The Company also has an incentive plan for executives of the Company, which provides for performance basedcash and stock-based compensation awards. No expense was recognized during the years ended June 30, 2018, 2017 and 2016 for cash awards pursuant to theplan.Net Income (Loss) Per Share: Basic earnings per share excludes dilution and is determined by dividing income available to common stockholders by theweighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities and othercontracts to issue common stock were exercised or converted into common stock.Fair Value of Financial Instruments: The Company considers the fair value of cash, accounts receivable and accounts payable to approximate their carryingvalues at year-end due to their short-term nature. The carrying value of the Company’s debt approximates fair value due to the market rates of interest.Fair Value Measurements: The Company employs a hierarchy which prioritizes the inputs used to measure recurring fair value into three distinct categoriesbased on the lowest level of input that is significant to the fair value measurement. Our methodology for categorizing assets and liabilities that are measuredat fair value pursuant to this hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest levels to unobservable inputs,summarized as follows:•Level 1 – Quoted prices in active markets for identical assets or liabilities.•Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities).•Level 3 – Significant unobservable inputs (including our own assumptions in determining fair value).We use the cost, income or market valuation approaches to estimate the fair value of our assets and liabilities when insufficient market-observable data isavailable to support our valuation assumptions. The purchase price allocations relating to the acquisitions completed during the years ended June 30, 2017and 2016 utilized level 3 inputs.Segment Reporting: The Company operates in a single segment, focusing on developing cost-effective management solutions for medical waste and unuseddispensed medications generated by small and medium quantity generators.Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities at thedate of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. The Company uses estimates todetermine many reported amounts, including but not limited to allowance for doubtful accounts, recoverability of long-lived assets and intangibles, usefullives used in depreciation and amortization, income taxes and valuation allowances, stock-based compensation, fair values of assets and liabilities acquiredin business combinations, selling price used in multiple-deliverable arrangements and return rates used to estimate the percentage of container systems soldthat will not be returned. Actual results could differ from these estimates.Reclassification of Prior Year Presentation in the Consolidated Statements of Cash Flows: Certain prior year amounts have been reclassified for consistencywith the current year presentation in the Consolidated Statements of Cash Flows. The change in classification does not affect previously reported cash flowsfrom operating activities, investing activities or financing activities in the Consolidated Statements of Cash Flows.F-11Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016Recently Issued Accounting Standards: In May 2014 and as subsequently amended, guidance for revenue recognition was issued which supersedes therevenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determiningthe amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statementdisclosures 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 full retrospective approach or a modified retrospective approach to implement the standard. The guidance iseffective for annual reporting periods beginning after December 15, 2017 (effective July 1, 2018 for the Company). The Company has substantiallycompleted its analysis to evaluate the impact that the new accounting guidance will have on its consolidated financial statements and related disclosureswhich included identifying the material revenue streams and reviewing a representative sample of contracts. As a result of the analysis, the Companydetermined the following:•The transportation and treatment performance obligations related to the mail back and unused medication solutions, which were historicallyaccounted for as separate performance obligations, will be accounted for as a single performance obligation under the amended revenue recognitionguidance. The impact of this is not expected to be material.•Certain costs associated with obtaining long-term contracts with customers will be capitalized and amortized over the expected economic life of thecontract in future period. The impact of this is not expected to be material.•The new guidance may change the timing of revenue recognition and related expense on certain of the Company’s vendor managed inventorycontracts. We are currently finalizing our analysis but expect the cumulative adjustment to be less than $0.4 million.The Company intends to adopt the standard using the modified retrospective approach, which involves retrospectively adopting the standard by recording acumulative effect adjustment to all uncompleted contracts at July 1, 2018.In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess oftwelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. Theprovisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), includinginterim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact of the newguidance on its consolidated financial statements and related disclosures as well as evaluating the available transition methods. The Company will continueto evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.NOTE 3 – PROPERTY, PLANT AND EQUIPMENTAt June 30, 2018 and 2017, property, plant and equipment consisted of the following (in thousands): June 30, Useful Life 2018 2017Furniture and fixtures 3 to 5 years $245 $260Plant and equipment 3 to 17 years 8,241 7,975Manufacturing 15 years 169 220Computers and software 3 to 5 years 2,064 2,246Leasehold improvements Life of Lease 2,729 2,681Land 19 19Construction-in-progress 716 347 14,183 13,748Less: accumulated depreciation 7,611 7,205Net property, plant and equipment $6,572 $6,543F-12Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016Total depreciation expense in the fiscal years ended June 30, 2018, 2017 and 2016 was $1.0 million, $0.9 million and $0.7 million, respectively.Depreciation expense included in cost of revenues in the fiscal years ended 2018, 2017 and 2016 was $0.8 million, $0.7 million and $0.5 million,respectively.NOTE 4 – INCOME TAXESThe components of income tax expense (benefit) are as follows (in thousands): Year ended June 30, 2018 2017 2016Current: Federal$— $— $—State29 4 24Total Current$29 $4 $24 Deferred: Federal$(8) $— $—State— — —Total Deferred(8) — —Net Income Tax Expense$21 $4 $24The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended June 30, 2018, 2017 and 2016 is asfollows : Year Ended June 30, 2018 2017 2016Statutory rate27.6 % 34.0 % 34.0 %State income taxes, net(3.7)% (4.5)% (18.6)%Impact of 2017 tax reform(107.0)% — % — %Meals and entertainment(1.8)% (1.5)% 38.7 %Stock-based compensation22.6 % — % — %AMT and research and development credits22.4 % — % (218.9)%Other(2.0)% 0.2 % 1.5 %Effective rate before valuation allowance(41.9)% 28.2 % (163.3)%Change in valuation allowance38.7 % (28.5)% 228.2 %Effective tax rate(3.2)% (0.3)% 64.9 %The statutory rate for the year ended June 30, 2018 is a blended rate which was calculated based on the Company's fiscal year and the date that the tax ratechanges were effective.A valuation allowance has been recorded to reduce the Company’s net deferred tax assets to an amount that is more likely than not to be realized and is basedupon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes. Theestablishment of valuation allowances requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well asthe objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.F-13Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016At June 30, 2018 and 2017, the significant components of deferred tax assets and liabilities are approximated as follows (in thousands): June 30, 2018 2017Deferred tax assets relating to: Stock-based compensation$283 $398AMT and research and development credits668 523Deferred rent58 77Inventory147 211Professional fees91 155Accrued vacation31 43Accounts receivable allowance26 49Contribution carryovers13 12Net operating loss carryforwards1,153 1,443Total deferred tax assets2,470 2,911Deferred tax liabilities related to depreciable and amortizable assets(587) (783)Net deferred tax assets before valuation allowance1,883 2,128Valuation allowance(1,875) (2,128)Net deferred tax assets$8 $—At June 30, 2018, the Company had net operating loss carryforwards of $5.3 million, of which $4.7 million will expire, if unused, between June 30, 2032 andJune 30, 2037. At June 30, 2018, the Company had various tax credit carryforwards of $0.7 million, of which $0.4 million will expire beginning on June 30,2030 and $0.3 million related to alternative minimum tax credits which will be refunded as described below.The Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017, contains significant changes to U.S. tax law, including lowering the U.S. corporateincome tax rate to 21% and repeal of the corporate alternative minimum tax for tax years beginning on or after January 1, 2018. Other provisions in the 2017tax reform such as interest deductibility, changes to executive compensation plans, full expensing provisions for business assets, other new minimum taxesand international taxation modifications are not expected to have material implications to the Company's financial statements. Also, in December 2017, theSEC issued guidance on accounting for tax effects of the 2017 tax reform which provides a measurement period that should not extend beyond one year fromthe enactment date for companies to complete the applicable accounting. In accordance with the guidance, a company must reflect the income tax effects ofthose aspects for which the accounting under the guidance is complete. To the extent that a company’s accounting for certain income tax effects isincomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. While we are ableto make reasonable estimates of the impact of the reduction in corporate rate and the repeal of the corporate alternative minimum tax for tax years beginningon or after January 1, 2018, the final impact of the 2017 tax reform may differ from these estimates, due to, among other things, changes in our interpretationsand assumptions, additional guidance that may be issued by the Internal Revenue Service ("IRS"), and actions we may take. We are continuing to gatheradditional information to determine the final impact.The Company is required to recognize the impacts of the rate change on its deferred tax assets and liabilities in the period enacted. However, as the Companyhas a full valuation allowance on its net deferred tax asset, any deferred tax recognized due to the change in rate will be offset with a change in the valuationallowance. Therefore, there was no overall impact to the financial statements in the year ended June 30, 2018 due to this change in rate. However, the repealof the corporate alternative minimum tax provides for existing alternative minimum tax credit carryovers to be refunded beginning in 2018 and available tooffset deferred tax liabilities related to indefinite lived assets as described below. As such, most of the valuation allowance in place at June 30, 2018 relatedto these credits has been released on a provisional basis and a deferred asset recorded for the expected benefit in future years. During the year ended June 30,2018, the Company recorded an $8,000 deferred tax asset in Other Assets on the balance sheet, representing the net benefit of remeasuring its deferred taxassets for recoverable alternative minimum tax credits pursuant to the 2017 tax reform in the amount of $245,000 offset by deferred tax liabilities related toindefinite lived assets, such as goodwill, in the amount of $237,000, which cannot be used as a source of future taxable income in evaluating the need for avaluation allowance against deferred tax assets. The Company's remaining net deferred tax assets continue to be fully offset by a valuation allowance. TheCompany's gross deferred tax assets and the offsetting valuation allowance decreased on a provisional basis by approximately $0.7 million as a result of thereduction of the U.S. tax rate to 21%.F-14Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBTOn March 29, 2017, the Company entered into to a credit agreement with a commercial bank which was subsequently amended on June 29, 2018 to extendthe maturity date by two years (“Credit Agreement”). The Credit Agreement, which replaced the Company’s prior credit agreement, provides for a $14.0million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and generalcorporate purposes and (ii) $8.0 million for acquisitions. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assetswith advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as defined in the CreditAgreement) equal to 80% of eligible accounts receivable plus the lesser of (i) 50% of eligible inventory and (ii) $3.0 million. Advances under the acquisitionportion of the credit facility are limited to 75% of the purchase price of an acquired company and convert to a five-year term note at the time of theborrowing. Borrowings bear interest at the greater of (a) zero percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5%. The LIBOR Marginmay increase to as high as 3.0% depending on the Company’s cash flow leverage ratio. The interest rate as of June 30, 2018 was approximately 4.63%. TheCompany pays a fee of 0.25% per annum on the unused amount of the credit facility.At June 30, 2018, long-term debt consisted of the following (in thousands):Non-interest bearing, unsecured note payable assumed in acquisition (See Note 12), monthly payments of $7; maturing September 2018.$20 Term loan, bearing interest at 4.63%, monthly payments of $43; maturing March 2022.1,982 Total long-term debt2,002Less: current portion537Long-term debt, net of current portion$1,465The Company has availability under the Credit Agreement of $12.0 million ($6.0 million for the working capital and $6.0 million for the acquisitions) as ofJune 30, 2018. The Company also has $40,000 in letters of credit outstanding as of June 30, 2018.The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flowleverage ratio of no more than 3.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The Credit Agreement, which expires onMarch 29, 2021 for the working capital portion of the Credit Agreement, also contains customary events of default which, if uncured, may terminate theCredit Agreement and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount available under theCredit Agreement. The Company was in compliance with all the financial covenants under the Credit Agreement as of June 30, 2018.Payments due on long-term debt over the five years subsequent to June 30, 2018 are as follows (in thousands):Twelve Months Ending June 30, 2019$537202051720215172022431 $2,002NOTE 6 - EQUITY TRANSACTIONSOn January 7, 2013, the Company announced that its Board of Directors approved a stock repurchase program effective January 3, 2013, authorizing theCompany to repurchase in the aggregate up to $3 million of its outstanding common stock over a two-year period. On March 5, 2015, the Board approved atwo-year extension of the stock repurchase program through January 1, 2017. The program has not been extended. During the years ended June 30, 2018,2017 and 2016, shares were repurchased as follows:F-15Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016 Year ended June 30, 2018 2017 2016 Shares repurchased— — 104,365Cash paid for shares repurchased (in thousands)$— $— $745Average price paid per share$— $— $7.14Total shares repurchased under the program are 295,615 shares at a cost of $1.6 million.During the year ended June 30, 2018, the Company issued 20,617 shares of common stock as a portion of consideration for a third-party lease agreement. Theshares were issued at $4.00 per share based on the closing price on the date of grant. This issuance was exempt from registration pursuant to Section 4(a)(2) ofthe Securities Act. Non-cash expense recorded during the year ended June 30, 2018 was $37,000. The remaining cost of $46,000 will be amortized over thelife of the lease and is included in Prepaid and Other Current Assets or Other Assets on the balance sheet.NOTE 7 - STOCK BASED COMPENSATIONThe Company sponsors the Sharps Compliance Corp. 2010 Stock Plan (the “2010 Plan”) covering employees, consultants and non-employee directors. The2010 Plan provides for the granting of stock-based compensation (stock options or restricted stock) of up to 3,000,000 shares of the Company’s commonstock of which 933,153 options and restricted shares are outstanding as of June 30, 2018. Options granted generally vest over a period of four years andexpire seven years after the date of grant. Restricted stock generally vests over one year. As of June 30, 2018, there were 1,453,649 options available for grantunder the 2010 Plan.The summary of activity for all restricted stock during the fiscal years ended June 30, 2018, 2017 and 2016 is presented in the table below (in thousands): Year ended June 30, 2018 2017 2016 Unvested at beginning of the year13 13 13Granted53 53 53Vested(53) (53) (53)Unvested at end of the year13 13 13The weighted average fair value per share of restricted stock granted during the fiscal years ended June 30, 2018, 2017 and 2016 was $4.17, $4.38 and $8.00,respectively. The weighted average fair value per share of restricted stock which vested during the fiscal years ended June 30, 2018, 2017 and 2016 was$4.22, $5.29 and $7.07, respectively.F-16Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016The summary of activity for all stock options during the fiscal years ended June 30, 2018, 2017 and 2016 is presented in the table below (in thousands exceptper share amounts): OptionsOutstanding WeightedAverageExercisePriceOptions Outstanding at June 30, 20151,375 $4.49Granted45 $6.62Exercised(112) $2.77Forfeited or canceled(18) $5.99 Options Outstanding at June 30, 20161,290 $4.69Granted38 $4.55Exercised(95) $3.60Forfeited or canceled(368) $5.32 Options Outstanding at June 30, 2017865 $4.53Granted137 $4.79Forfeited or canceled(82) $4.50 Options Outstanding at June 30, 2018920 $4.57 Options Exercisable at June 30, 2018634 $4.46The following table summarizes information about stock options outstanding as of June 30, 2018 (in thousands except per share amounts): Options OutstandingRange of ExercisePrice Outstanding as ofJune 30, 2018 WeightedAverageRemainingLife (in Years) WeightedAverageExercisePrice 2.51 - $3.50 41 1.49 $2.953.51 - $5.50 748 3.27 $4.425.51 - $7.50 131 3.82 $5.97 920 $4.57The following table summarizes information about stock options exercisable as of June 30, 2018 (in thousands except per share amounts): Options ExercisableRange of ExercisePrice Exercisable as ofJune 30, 2018 WeightedAverageRemainingLife (in Years) WeightedAverageExercisePrice 2.51 - $3.50 41 1.49 $2.953.51 - $5.50 502 2.35 $4.325.51 - $7.50 91 3.79 $5.90 634 $4.46F-17Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016As of June 30. 2018, there was $0.3 million of stock option and restricted stock compensation expense related to non-vested awards. This expense is expectedto be recognized over a weighted average period of 2.3 years.NOTE 8 - COMMITMENTS AND CONTINGENCIESOperating Leases: The Company operates in a number of locations across the U.S. including space for corporate offices in Houston, Texas. Sharps hasmanufacturing, assembly, storage, distribution and warehousing operations as well as two (2) fully-permitted facilities that house our processing andtreatment operations. The Company owns one processing and treatment facility and leases all other spaces. The Company also leases a number of trucks andoffice equipment. The leases expire between fiscal years 2019 to 2024 with options to renew ranging from 1 years to 5 years.Rent expense for the fiscal years ended June 30, 2018, 2017 and 2016 was $2.0 million, $1.5 million and $0.9 million, respectively. Future minimum leasepayments under non-cancelable operating leases as of June 30, 2018 are as follows (in thousands): Year Ended June 30, 2019 2020 2021 2022 2023 ThereafterOperating lease obligations$2,166 $1,903 $1,165 $414 $71 $17Performance Bonds: The Company utilizes performance bonds to support operations based on certain state requirements. At June 30, 2018, the Company hadperformance bonds outstanding covering financial assurance up to $0.7 million.Other: From time to time, the Company is involved in legal proceedings and litigation in the ordinary course of business. In the opinion of management, theoutcome of such matters is not anticipated to have a material adverse effect on the Company’s consolidated financial position or consolidated results ofoperations.NOTE 9 - EARNINGS PER SHAREBasic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares after considering the additionaldilution related to common stock options and restricted stock. In computing diluted earnings per share, the outstanding common stock options areconsidered dilutive using the treasury stock method.The Company’s restricted stock awards are treated as outstanding for earnings per share calculations since these shares have full voting rights and are entitledto participate in dividends declared on common shares, if any, and undistributed earnings. As participating securities, the shares of restricted stock areincluded in the calculation of basic EPS using the two-class method. For the periods presented, the amount of earnings allocated to the participatingsecurities was not material.The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per share amounts): Year ended June 30, 2018 2017 2016 Net income (loss), as reported$(672) $(1,293) $13 Weighted average common shares outstanding16,055 15,949 15,448Effect of dilutive stock options— — 390Weighted average diluted common shares outstanding16,055 15,949 15,838 Net income (loss) per common share Basic and diluted$(0.04) $(0.08) $0.00 Employee stock options excluded from computation of diluted income per share amountsbecause their effect would be anti-dilutive402 304 137NOTE 10 – GOODWILL AND INTANGIBLE ASSETSAt June 30, 2018 and 2017, intangible assets consisted of the following (in thousands):F-18Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016 June 30, 2018 2017 EstimatedUseful LivesOriginalAmount AccumulatedAmortization NetAmount OriginalAmount AccumulatedAmortization NetAmount Customerrelationships7 years$3,007 $(919) $2,088 $3,007 $(490) $2,517Permits6 - 15 years1,459 (390) 1,069 1,373 (288) 1,085Patents5 - 17 years383 (278) 105 383 (264) 119Tradename7 years270 (77) 193 270 (39) 231Non-compete5 years117 (47) 70 117 (23) 94Total intangibleassets, net $5,236 $(1,711) $3,525 $5,150 $(1,104) $4,046During the years ended June 30, 2018, 2017 and 2016 amortization expense was $0.6 million, $0.6 million and $0.1 million, respectively.The changes in the carrying amount of goodwill since June 30, 2016 was as follows (in thousands): Year Ended June 30, 2018 2017Beginning Balance$6,735 $1,039Goodwill Acquired— 5,696Ending Balance$6,735 $6,735As of June 30, 2018, future amortization of intangible assets is as follows (in thousands):Year Ending June 30, 2019$6172020621202162020225952023534Thereafter538 $3,525NOTE 11 – REVENUES BY SOLUTIONThe components of revenues by solution are as follows (dollars in thousands): Year Ended June 30, 2018 % Total 2017 % Total 2016 % TotalREVENUES BY SOLUTION: Mailbacks$21,786 54.3% $24,135 63.2% $23,743 71.1%Route-based pickup services7,492 18.7% 6,348 16.6% 2,061 6.2%Unused medications5,907 14.7% 3,377 8.8% 3,531 10.6%Third party treatment services891 2.2% 413 1.1% 258 0.8%Other (1)4,065 10.1% 3,915 10.3% 3,790 11.3%Total revenues$40,141 100.0% $38,188 100.0% $33,383 100.0%(1)The Company’s other products include non-mailback products such as IV poles, accessories, containers, asset return boxes and other miscellaneousitems.F-19Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016NOTE 12 – ACQUISITIONSEffective July 17, 2015, the Company acquired Alpha Bio/Med Services LLC, a route-based pickup service located in Pennsylvania for total cashconsideration of $0.7 million.The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):Accounts receivable$51Fixed assets70Intangibles267Goodwill413Accounts payable and accrued liabilities(101)Total purchase price$700Effective on December 14, 2015, the Company acquired Bio-Team Mobile LLC, a route-based pickup service located in Pennsylvania for total cashconsideration of $1.0 million.The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):Accounts receivable$42Fixed assets68Intangibles313Goodwill626Accounts payable and accrued liabilities(16)Total purchase price$1,033Effective July 1, 2016, the Company acquired Citiwaste, LLC (“Citiwaste”), a route-based pickup service located in New York, which is in the business ofmedical, pharmaceutical and hazardous waste management primarily in the healthcare industry. The purchase price consisted of $7.0 million in cash ($3.0million of which was borrowed under the acquisition portion of its Credit Agreement), 415,527 shares of common stock of the Company (the “CommonStock Consideration”) valued at $1.9 million, and a lease obligation paid to the seller for $0.1 million for a total consideration of $9.0 million. The Companyheld shares of the Common Stock Consideration in escrow for the one-year period to cover indemnification obligations of the sellers under the purchaseagreement which were released on June 30, 2017.For the year ended June 30, 2017, the Company recognized approximately $3.6 million in revenues related to the operations of Citiwaste.The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):Cash$5Accounts receivable495Fixed assets30Intangibles3,357Goodwill5,696Accounts payable and accrued liabilities(356)Debt assumed(187)Total purchase price$9,040The Company incurred acquisition related expenses for investment banking, legal and accounting fees which are included within selling, general andadministrative expenses in the consolidated statements of operations as follows (in thousands): Twelve-Months EndedJune 30, 2018 2017 2016 Acquisition-related expenses$— $702 $190F-20Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2018, 2017 and 2016The results of operations of the acquired business have been included in the consolidated statements of operations from the date of acquisition. Pro formaresults of operations for Alpha Bio/Med Services and Bio-Team Mobile are not presented because the pro forma effects, individually and in the aggregate, arenot material to the Company’s consolidated results of operations. The goodwill recorded for the Alpha Bio/Med Services, Bio-Team Mobile, and Citiwasteacquisitions will be deductible for income taxes.The goodwill recognized for the acquisitions since July 1, 2015 is attributable to expected revenue synergies generated by the integration of our productsand services with those acquisitions, cost synergies resulting from the consolidation or elimination of certain functions, and intangible assets that do notqualify for separate recognition such as the assembled workforce of each acquisition.Supplemental Pro Forma Data (Unaudited)Citiwaste’s financial results since the date of the acquisition have been included in our consolidated financial results for the years ended June 30, 2018 and2017. The following table presents summarized unaudited pro forma financial information as if the Citiwaste acquisition occurred on July 1, 2015 (inthousands, except per-share data): Twelve-Months Ended June 30, 2016 Revenues$36,306Net loss$(159)Weighted average common shares outstanding15,861Net loss per common share basic and diluted$(0.01)NOTE 13 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)The following tables show quarterly financial information for the years ended June 30, 2018 and 2017. The Company believes that all necessary adjustmentshave been included in the amounts below to present fairly the results of such periods (in thousands expect per share amounts). Quarter Ended September 30,2017 December 31,2017 March 31,2018 June 30, 2018Total revenues$9,683 $11,119 $9,427 $9,912Gross profit$3,028 $3,131 $2,296 $2,947Operating income (loss)$101 $107 $(707) $(78)Net income (loss)$75 $156 $(757) $(146)Net income (loss) per share - basic and diluted$0.00 $0.01 $(0.05) $(0.01)Weighted average shares - diluted16,093 16,068 16,082 16,082 Quarter Ended September 30,2016 December 31,2016 March 31,2017 June 30, 2017Total revenues$9,531 $9,707 $8,588 $10,362Gross profit$2,959 $2,895 $2,352 $3,631Operating income (loss)$(940) $(204) $(638) $595Net income (loss)$(967) $(227) $(668) $569Net income (loss) per share - basic and diluted$(0.06) $(0.01) $(0.04) $0.04Weighted average shares - diluted15,868 15,929 15,994 16,029F-21Exhibit 10.21FIRST MODIFICATION OF LOAN DOCUMENTSTHIS FIRST MODIFICATION OF LOAN DOCUMENTS (this "Agreement") is entered into effective June 29, 2018, by andamong SHARPS COMPLIANCE, INC. OF TEXAS, a Texas corporation d/b/a Sharps Compliance, Inc. ("Borrower") and[REDACTED], a [REDACTED] state chartered bank whose address for purposes of notice is [REDACTED], and its successors andassigns (“Bank”). Unless otherwise defined herein or unless the context indicates otherwise, any word herein beginning with acapitalized letter shall have the meaning ascribed to such word in that certain Loan Agreement (the "Loan Agreement"), dated as ofMarch 29, 2017, between Borrower and Bank.W I T N E S S E T H:WHEREAS, Bank previously agreed to make a revolving line of credit in the amount of $6,000,000.00 (the “Line of Credit”)and a guidance line in the amount of $8,000,000.00 to Borrower in accordance with and subject to the terms and conditions of the LoanAgreement; andWHEREAS, Borrower has requested that Bank extend the Maturity Date of the Line of Credit and the Term Loan Advance Dateuntil March 29, 2021; andWHEREAS, Bank has agreed to such request subject to the terms and conditions set forth herein.NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that for and in consideration of the terms and conditionscontained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by theparties hereto, Bank and Borrower hereby agree as follows:ARTICLE I - AMENDMENTSSection 1.1 Current Note Balance. Prior to the execution hereof, the aggregate amount advanced by Bank under the RevolvingNote was Zero and No/100 Dollars ($0.00) and the aggregate amount advanced by Bank under the Term Notes was One Million NineHundred Ninety-Three Thousand Three Hundred Thirty-Three and 41/100 Dollars ($1,993,333.41).Section 1.2 Renewal and Extension. The maturity date of the Revolving Note is hereby extended until March 29, 2021, whenthe unpaid principal balance of the Revolving Note, together with all accrued but unpaid interest thereon, shall be due and payable (the“Maturity Date”), unless the Maturity Date is accelerated pursuant to Bank’s right to do so under the Loan Documents. The Borrowerhereby renews, but does not extinguish, the Revolving Note and the liens, security interests and assignments created and evidenced bythe Security Agreement and other Loan Documents, and in this regard all of the Loan Documents are hereby renewed and modified byextending the maturity date thereof as set forth above. Borrower covenants to observe, comply with and perform each of the terms andprovisions of the Loan Documents, as modified hereby.Section 1.3 Term Loan Advance Date. The term “Term Loan Advance Date” as defined in Section 1.1 of the LoanAgreement is hereby amended and restated in its entirety as follows:“Term Loan Advance Date” means March 29, 2021.Section 1.4 Representations and Warranties in Loan Agreement. Borrower hereby represents and warrants to Bank that allrepresentations and warranties made by Borrower in the Loan Agreement as of the date thereof are true and correct as of the datehereof, as if such representations and warranties were recited herein in their entirety.Section 1.5 Definition of Loan Documents. The term "Loan Documents" as defined in the Loan Agreement and as used in theLoan Agreement and the other Loan Documents and herein, shall be, and hereby is, modified to include this Agreement and any and allother documents executed in connection with this Agreement. All references to the term "Loan Documents" contained in the LoanAgreement and the other Loan Documents are hereby modified and amended wherever necessary to reflect such modification of suchterm.ARTICLE II - MISCELLANEOUSSection 2.1 Conditions Precedent. On or prior to the effective date hereof and as conditions precedent to the agreements of theBank herein set forth, Borrower shall deliver to Bank an original fully executed counterpart of this Agreement.Section 2.2 Acknowledgment by Borrower. Except as otherwise specified herein, the terms and provisions hereof shall in nomanner impair, limit, restrict or otherwise affect the obligations of Borrower or any Loan Party to Bank, as evidenced by the LoanDocuments. Borrower hereby acknowledges, agrees and represents that (i) Borrower is indebted to Bank pursuant to the terms of theNote as modified hereby; (ii) the liens, security interests and assignments created and evidenced by the Loan Documents are,respectively, valid and subsisting liens, security interests and assignments of the respective dignity and priority recited in the LoanDocuments; (iii) there are no claims or offsets against, or defenses or counterclaims to, the terms or provisions of the Loan Documents,and the other obligations created or evidenced by the Loan Documents; (iv) Borrower has no claims, offsets, defenses or counterclaimsarising from any of Bank’s acts or omissions with respect to the Property, the Loan Documents or Bank’s performance under the LoanDocuments or with respect to the Property; (v) the representations and warranties contained in the Loan Documents are true and correctrepresentations and warranties of Borrower, as of the date hereof; and (vi) Bank is not in default and no event has occurred which, withthe passage of time, giving of notice, or both, would constitute a default by Bank of Bank’s obligations under the terms and provisionsof the Loan Documents. Borrower waives, discharges, and forever releases Bank, Bank’s employees, officers, directors, attorneys,stockholders, and their successors and assigns, from and of any and all claims, causes of action, allegations or assertions that Borrowerhas or may have had at any time up through and including the date of this Agreement, against any or all of the foregoing, regardless ofwhether any such claims, causes of action, allegations or assertions are known to Borrower or whether any such claims, causes ofaction, allegations or assertions arose as result of Bank’s actions or omissions in connection with the Loan Documents, or anyamendments, extensions or modifications thereof, or Bank’s administration of the debt evidenced by the Loan Documents or otherwise,INCLUDING ANY CLAIMS, CAUSES OF ACTION, ALLEGATIONS OR ASSERTIONS RESULTING FROM BANK’S OWNNEGLIGENCE, except and to the extent (but only to the extent) caused by Bank’s gross negligence or willful misconduct.Section 2.3 No Waiver of Remedies. Except as may be expressly set forth herein, nothing contained in this Agreement shallprejudice, act as, or be deemed to be a waiver of any right or remedy available to Bank by reason of the occurrence or existence of anyfact, circumstance or event constituting a default under the Note or the other Loan Documents.Section 2.4 Joinder of Guarantor. By its execution hereof, Guarantor hereby (i) acknowledges and consents to the terms andprovisions hereof; (ii) ratifies and confirms the Guaranty, including all interest and costs of collection, to or for the benefit of Bank; (iii)agrees that the Guaranty is and shall remain in full force and effect and that the terms and provisions of the Guaranty cover and pertainto the Loan, Note, Deed of Trust and other Loan Documents as modified hereby; (iv) acknowledges that there are no claims or offsetsagainst, or defenses or counterclaims to, the terms and provisions of the Guaranty or the other obligations created and evidenced by theGuaranty; (v) certifies that the representations and warranties contained in the Guaranty remain true and correct representations andwarranties of Guarantor as of the date hereof; and (vi) acknowledges that Bank has satisfied and performed its covenants andobligations under the Guaranty and the other Loan Documents, and that no action or failure to act by or on behalf of, Bank has or willgive rise to any cause of action or other claim against Bank for breach of the Guaranty or other Loan Documents or otherwise.Section 2.5 Interest Limitation. The Note and all Loan Documents are intended to be performed in accordance with, and onlyto the extent permitted by, all applicable usury laws. If any provision hereof or of any of the other Loan Documents or the applicationthereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the application ofsuch provision to any other person or circumstance nor the remainder of the instrument in which such provision is contained shall beaffected thereby and shall be enforced to the greatest extent permitted by law. It is expressly stipulated and agreed to be the intent of theholder of the Note to at all times comply with the usury and other applicable laws now or hereafter governing the interest payable onthe indebtedness evidenced by the Note. If the applicable law is ever revised, repealed or judicially interpreted so as to render usuriousany amount called for under the Note or under any of the other Loan Documents, or contracted for,charged, taken, reserved or received with respect to the indebtedness evidenced by the Note, or if Bank’s exercise of the option toaccelerate the maturity of the Note, or if any prepayment by Borrower or prepayment agreement results (or would, if complied with,result) in Borrower having paid, contracted for or been charged for any interest in excess of that permitted by law, then it is the expressintent of Borrower and Bank that the Note and the other Loan Documents shall be limited to the extent necessary to prevent such resultand all excess amounts theretofore collected by Bank shall be credited on the principal balance of the Note or, if fully paid, upon suchother Indebtedness as shall then remaining outstanding (or, if the Note and all other Indebtedness have been paid in full, refunded toBorrower), and the provisions of the Note and the other Loan Documents shall immediately be deemed reformed and the amountsthereafter collectable hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to complywith the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder or thereunder. Allsums paid, or agreed to be paid, by Borrower for the use, forbearance, detention, taking, charging, receiving or reserving of theindebtedness of Borrower to Bank under the Note or arising under or pursuant to the other Loan Documents shall, to the maximumextent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness untilpayment in full so that the rate or amount of interest on account of such indebtedness does not exceed the usury ceiling from time totime in effect and applicable to such indebtedness for so long as such indebtedness is outstanding. To the extent federal law permitsBank to contract for, charge or receive a greater amount of interest, Bank will rely on federal law instead of the [REDACTED] FinanceCode for the purpose of determining the Maximum Rate. Additionally, to the maximum extent permitted by applicable law now orhereafter in effect, Bank may, at its option and from time to time, implement any other method of computing the Maximum Rate underthe [REDACTED] Finance Code or under other applicable law, by giving notice, if required, to Borrower as provided by applicable lawnow or hereafter in effect. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is notthe intention of Bank to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collectunearned interest at the time of such acceleration.Section 2.6 Notices. Any notices or other communications required or permitted under this Agreement or the Loan Documentsshall be provided in accordance with the requirements therefor as set forth in the Loan Documents.Section 2.7 Costs and Expenses. Contemporaneously with the execution and delivery hereof, Borrower shall pay, or cause tobe paid, all costs and expenses incident to the preparation, execution and recordation hereof and the consummation of the transactioncontemplated hereby, including, but not limited to, recording fees, title insurance policy or endorsement premiums or other charges ofthe Title Company, and reasonable fees and expenses of legal counsel to Bank.Section 2.8 Additional Documentation. From time to time, Borrower shall execute or procure and deliver to Bank such otherand further documents and instruments evidencing, securing or pertaining to the Loan or the Loan Documents as shall be reasonablyrequested by Bank so as to evidence or effect the terms and provisions hereof. Upon Bank’s request, Borrower shall cause to bedelivered to Bank an opinion of counsel, satisfactory to Bank as to form, substance and rendering attorney, opining to (i) the validityand enforceability of this Agreement and the terms and provisions hereof, and any other agreement executed in connection with thetransaction contemplated hereby; (ii) the authority of Borrower, and any constituents of Borrower, to execute, deliver and perform its ortheir respective obligations under the Loan Documents, as hereby modified; and (iii) such other matters as reasonably requested byBank.Section 2.9 Effectiveness of the Loan Documents. Except as expressly modified by the terms and provisions hereof, each ofthe terms and provisions of the Loan Documents are hereby ratified and shall remain in full force and effect; provided, however, thatany reference in any of the Loan Documents to the Note, the amount of the Note, any defined terms, or to any of the other LoanDocuments shall be deemed, from and after the date hereof, to refer to the Note, the amount of the Note, defined terms and to suchother Loan Documents, as modified hereby.Section 2.10 Governing Law. THE TERMS AND PROVISIONS HEREOF SHALL BE GOVERNED BY ANDCONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF [REDACTED], EXCEPT AS OTHERWISEEXPRESSLY PROVIDED HEREIN.Section 2.11 Time. Time is of the essence in the performance of the covenants contained herein and in the Loan Documents.Section 2.12 Binding Agreement. This Agreement shall be binding upon the heirs, executors, administrators, personalrepresentatives, successors and assigns of the parties hereto; provided, however, the foregoing shall not be deemed or construed to (i)permit, sanction, authorize or condone the assignment of all or any part of the Collateral or any of Borrower’s rights, titles or interests inand to the Collateral or any rights, titles or interests in and to Borrower, except as expressly authorized in the Loan Documents, or (ii)confer any right, title, benefit, cause of action or remedy upon any person or entity not a party hereto, which such party would not ordid not otherwise possess.Section 2.13 Headings. The section headings hereof are inserted for convenience of reference only and shall in no way alter,amend, define or be used in the construction or interpretation of the text of such section.Section 2.14 Construction. Whenever the context hereof so requires, reference to the singular shall include the plural andlikewise, the plural shall include the singular; words denoting gender shall be construed to mean the masculine, feminine or neuter, asappropriate; and specific enumeration shall not exclude the general, but shall be construed as cumulative of the general recitation.Section 2.15 Severability. If any clause or provision of this Agreement is or should ever be held to be illegal, invalid orunenforceable under any present or future law applicable to the terms hereof, then and in that event, it is the intention of the partieshereto that the remainder of this Agreement shall not be affected thereby, and that in lieu of each such clause or provision of thisAgreement that is illegal, invalid or unenforceable, such clause or provision shall be judicially construed and interpreted to be as similarin substance and content to such illegal, invalid or unenforceable clause or provision, as the context thereof would reasonably suggest,so as to thereafter be legal, valid and enforceable.Section 2.16 Counterparts. To facilitate execution, this Agreement may be executed in as many counterparts as may beconvenient or required. It shall not be necessary that the signature and acknowledgment of, or on behalf of, each party, or that thesignature and acknowledgment of all persons required to bind any party, appear on each counterpart. All counterparts shall collectivelyconstitute a single instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than a singlecounterpart containing the respective signatures and acknowledgment of, or on behalf of, each of the parties hereto. Any signature andacknowledgment page to any counterpart may be detached from such counterpart without impairing the legal effect of the signaturesand acknowledgments thereon and thereafter attached to another counterpart identical thereto except having attached to it additionalsignature and acknowledgment pages.Section 2.17 FINAL AGREEMENT. THIS AGREEMENT, THE LOAN DOCUMENTS AS MODIFIED HEREBY ANDTHE OTHER “LOAN AGREEMENTS” (AS SUCH TERM IS DEFINED IN SECTION 26.02(a)(2) OF THE TEXAS BUSINESSAND COMMERCE CODE, AS AMENDED) REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAYNOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTSOF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.Section 2.18 WAIVER OF RIGHT TO TRIAL BY JURY. BORROWER AND BANK ACKNOWLEDGE THAT THERIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTERCONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS CHOICE, KNOWINGLYAND VOLUNTARILY AND FOR THE MUTUAL BENEFIT OF ALL PARTIES WAIVES ANY RIGHT TO TRIAL BY JURYIN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAYRELATED TO, THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE INDEBTEDNESS.[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]EXECUTED as of the date first set forth above.Bank:[REDACTED],a [REDACTED] state chartered bankBy: Name: [REDACTED]Title: Senior Vice PresidentBorrower: SHARPS COMPLIANCE, INC. OF TEXAS,a Texas corporation d/b/a Sharps Compliance, Inc.By: ____________________________________________Name: Diana Precht DiazTitle: Vice President and Chief Financial OfficerGuarantor: ALPHA BIO/MED SERVICES, LLC,a Pennsylvania limited liability companyBy: ________________________________Name: ______________________________Title: _______________________________ BIO-TEAM MOBILE LLC,a Pennsylvania limited liability companyBy: ________________________________Name: ______________________________Title: _______________________________CITIWASTE, LLC,a New York limited liability company By: ________________________________Name: ______________________________Title: _______________________________Exhibit 21.1Subsidiaries of the RegistrantNameJurisdiction of IncorporationSharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.)TexasSharps e-Tools.com Inc.DelawareSharps Safety, Inc.TexasSharps Manufacturing, Inc.DelawareSharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.)DelawareAlpha Bio/Med Services LLCPennsylvaniaBio-Team Mobile LLCPennsylvaniaCitiwaste, LLCNew YorkExhibit 23.1Consent of Independent Registered Public Accounting FirmSharps Compliance Corp.Houston, TexasWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-155638, 333-200544 and 333-170765) of SharpsCompliance Corp. of our report dated August 22, 2018, relating to the consolidated financial statements, which appears in this Annual Report on Form 10-K./s/ BDO USA, LLPHouston, TexasAugust 22, 2018Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 302 OF THE SARBANES-OXLEY ACTI, 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: August 22, 2018By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer)Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICER IN ACCORDANCE WITH SECTION 302 OF THE SARBANES-OXLEY ACTI, 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: August 22, 2018By: /s/ DIANA P. DIAZ Diana P. Diaz Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 906 OF THE SARBANES-OXLEY ACTIn conjunction with the annual report of Sharps Compliance Corp. (the “Company”) on Form 10-K for the year ended June 30, 2018, as filed with theSecurities and Exchange Commission on the date hereof, I, David P. Tusa, Chief Executive Officer and President of the Company, certify, pursuant to 18U.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, 2018, filed with the Securities and Exchange Commission on August 22, 2018 fullycomplies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Form 10-K report for the year ended June 30, 2018 fairly presents, in all material respects, the financialcondition and results of operations of Sharps Compliance Corp.Date: August 22, 2018By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer)Exhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICER IN ACCORDANCE WITH SECTION 906 OF THE SARBANES-OXLEY ACTIn conjunction with the annual report of Sharps Compliance Corp. (the “Company”) on Form 10-K for the year ended June 30, 2018, as filed with theSecurities and Exchange Commission on the date hereof, I, Diana P. Diaz, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18U.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, 2018, filed with the Securities and Exchange Commission on August 22, 2018, fullycomplies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Form 10-K report for the year ended June 30, 2018 fairly presents, in all material respects, the financialcondition and results of operations of Sharps Compliance Corp.Date: August 22, 2018By: /s/ DIANA P. DIAZ Diana P. Diaz Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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