Sharps Compliance Annual Report 2019

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, 2019OR☐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. ý1Indicate 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 31, 2018, the aggregate market value of the registrant’s Common Stock held by non-affiliates was approximately $45.6 million (based on the closing price of $3.45on December 31, 2018 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 16,137,513 as of August 26, 2019.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 21, 2019 are incorporated by reference into Part III.2Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESTABLE OF CONTENTS *ANNUAL REPORT ON FORM 10-KPART IItem 1Business4Item 1ARisk Factors14Item 1BUnresolved Staff Comments18Item 2Properties19Item 3Legal Proceedings19Item 4Mine Safety Disclosures19PART IIItem 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities19Item 6Selected Financial Data20Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations20Item 8Financial Statements and Supplementary Data30Item 9Changes In and Disagreements with Accountants on Accounting and Financial Disclosure30Item 9AControls and Procedures30Item 9BOther Information31PART IIIItem 10Directors, Executive Officers and Corporate Governance31Item 11Executive Compensation31Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters31Item 13Certain Relationships and Related Transactions and Director Independence31Item 14Principal Accountant Fees and Services31PART IVItem 15Exhibits and Financial Statement Schedules32Item 16Form 10-K Summary33Signatures34 *This Table of Contents is inserted for convenience of reference only and is not a part of this Report as filed. 3Table of ContentsINFORMATION REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains certain forward-looking statements and information relating to the Company (as defined below) and itssubsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to theCompany’s management. When used 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 Companymanagement, are intended to identify forward-looking statements. Such statements reflect known and unknown risks, uncertainties and assumptions relatedto certain factors, including without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors,governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes inindustry practices, onetime events and other factors described herein. Based upon changing conditions, should any one or more of these risks oruncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein asanticipated, 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 risk factors and other cautionary statements in this Annual Report on Form 10-K. Actual results may varymaterially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predictor identify all such factors and as such should not consider 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 these forward-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.4Table of ContentsOur 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 the Drug Enforcement Administration (“DEA”) implementation of the Secure and ResponsibleDrug Disposal Act of 2010 (the “Act”), MedSafe is a superior solution used in both private and public sectors to properly remove medications fromcommunities 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 55% 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, the Black Pail Program for disposal of mostunused inventory of drugs, route-based services for medical, pharmaceutical and hazardous waste, the TakeAway Recycle System™ for single-use devices("SUDs") and the Hazardous Drug Spill Control Kit™, a USP <800> (as defined below) compliant spill kit for cleanup of chemotherapy and other hazardousdrug spills.As hospitals and surgery centers increase their sustainability efforts, they are looking for ways to recycle more materials, such as SUDs. SUDs are constructedof materials capable of being recycled, including plastics, metals, circuit boards and batteries. With a greater emphasis for more sustainable solutions, theTakeAway Recycle System is a much-needed complement to the single-use device market.We have developed a simple one-step program to safely and compliantly manage the unused inventory of pharmaceuticals. The Black Pail Program for Rxconsists of one container for the disposal of excess drugs, including Resource Conservation and Recovery Act ("RCRA") hazardous medications, controlledpharmaceutical wastage, and non-controlled, non-hazardous medications. We are expanding our hazardous waste direct pickup service to all the states in which we currently pick up medical waste. Most healthcare professionals havehazardous waste in addition to medical waste. By also transporting hazardous waste, we have a competitive advantage over local haulers while still offeringcost-effective pricing.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 159 full-time employees and 5 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. The Carthage facilityoffers both steam sterilization, autoclave and high heat incineration for the proper treatment of regulated medical waste and non-hazardous pharmaceuticals.The autoclave system is utilized alongside the incinerator for day-to-day operations. The Carthage location also serves as the Company's main facility formanaging our recycling solution.In August 2016, the Company received the Commonwealth of Pennsylvania Department of Environmental Protection Bureau of Waste Management permitfor the processing of medical waste at its treatment facility located in northeastern Pennsylvania. The 40,000 square foot facility has been permitted as both amedical waste treatment facility, using an autoclave, and as a transfer station for medical, pharmaceutical and trace chemotherapy waste of up to 82 tons perday. The facility is designed to cost-effectively and efficiently process medical waste generated by the Company’s route-based and mailback customers anddoubles as a distribution center of mailback solutions. It has been in operation since November 2016.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:5Table of ContentsSharps Recovery System™ (also known as the industry-leading Sharps Disposal by Mail System®) : a comprehensive solution for the containment,transportation, treatment and tracking of regulated medical waste generated outside the hospital and large health care facility setting. The Sharps RecoverySystem includes a securely sealed, leak and puncture resistant sharps container in several sizes ranging from one quart to twenty gallons; USPS-approvedshipping box with prepaid priority mail postage; absorbent material inside the container that can safely hold up to 150 milliliters of fluids; a bag foradditional containment and complete documentation and tracking manifest. The Sharps Recovery System is transported to our owned or contracted facilitiesfor treatment. Upon treatment or conversion of the waste, we provide electronic proof of receipt and treatment documentation to the customer through ourproprietary SharpsTracer® system.TakeAway Recovery System: innovative system designed for simplified and environmentally-friendly treatment of used needles, syringes, and other usedhealthcare products. The TakeAway Recovery System includes a sharps container in sizes ranging from one quart to thirty gallons; a prepaid-UPS returnshipping box, absorbent material inside the container that can safely hold up to 150 milliliters of fluids; a bag for additional containment and completedocumentation and tracking manifest. The TakeAway Recovery System is transported to our owned or contracted facilities for treatment. Upon treatment orconversion of the waste, we provide electronic proof of receipt and treatment documentation to the customer through our proprietary SharsTracer® 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 the DEA implementing the Act, which became effectiveOctober 9, 2014. MedSafe is designed for use in retail pharmacies, long-term care facilities, hospice, hospitals/clinics with on-site pharmacies, narcotictreatment 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.Black Pail Program for Rx: one-step solution with minimal segregation for the disposal of most pharmaceuticals, excluding aerosols and controlledsubstances. This 5-gallon pail includes the delivery, containment, pickup and proper disposal of unused inventory medications for one all-inclusive price.Hazardous Drug Spill Control Kit™: in response to the United States Pharmacopeia ("USP") publishing General Chapter <800> ("USP <800>") which setsstandards for handling hazardous drugs ("HD") in healthcare settings effective December 2019, the Company launched this USP <800> compliant spill kit forthe cleanup of chemotherapy and other HD spills.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 24/7.6Table of ContentsUniversal 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 ® Medical Waste Management System(“MWMS”) and Spill Kit 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 55% ofthe U.S. population.•From July 2015 to July 2016, the Company acquired three route-based pickup service companies, which strengthened the Company's position inthe Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a twenty-four(24) state region of the South, Southeast and Northeast portions of the United States. To facilitate operational efficiencies, the Company has openedtransfer stations and offices in strategic locations. The Company directly serves more than 12,900 customer locations with route-based pickupservices. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing theentire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including thosethat generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of thispipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup serviceare 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"), 44.9% of U.S. adults received a flu shot and32.2% of flu shots for adults were administered in a retail clinic in 2018. Over the flu seasons from 2011 to 2019, the Company saw growth in sixyears of 10% to 36%, including a 30% increase in 2019, and declines in three years of 13% to 17%. Despite the volatility, Sharps believes theRetail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retailpharmacies, 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 provide7Table of Contentsthe MedSafe and TakeAway Medication Recovery Systems to assisted living 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).COMPETITIVE 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.8Table of ContentsVertically-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.Diverse 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 healthcare, 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.9Table of ContentsOur billings by market for the years ended June 30, 2019, 2018 and 2017 are below (as expressed in percentages of revenues): Year Ended June 30, 2019 2018 2017BILLINGS BY MARKET*: Professional34% 33% 31%Retail26% 20% 19%Home Health Care17% 20% 21%Pharmaceutical Manufacturer9% 11% 16%Assisted Living6% 7% 6%Government5% 5% 4%Environmental1% 2% 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. Most of the difference between customer billings and GAAPrevenue is reflected in the Company's balance sheet as contract liability. See Note 2 “Summary of Significant Accounting Policies” in “Notes toConsolidated Financial Statements”. The Company believes this information about customer billings is useful to investors and other interested 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 strict guidelines regarding home sharps disposal. Whether legislation or strict guidelines, most ofthe U.S. population is required or strongly encouraged to not place used sharps in the household trash. In addition, certain states and counties have passedordinances requiring businesses such as hospitals and those that sell syringes to the public, such as retail pharmacies and veterinary clinics, to take backsyringes, 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 and in some cases home sharps disposal. State regulatory agencies are also addressing this issue, includingmultiple states which now require healthcare providers to avoid sewer and trash disposal of non-hazardous unused medications within their facilities. Statessuch as California, Washington and Minnesota have required assessment and proper treatment by a medical waste disposal company for years. However, otherstates such as Colorado and Florida are now requiring even small healthcare providers to segregate unused medications for proper disposal. In 2010, Congresspassed the Secure and Responsible Drug Disposal Act, leading to DEA changes to the Controlled Substances Act in 2014, allowing certain DEA registrants tocollect controlled substances from the public. Collection receptacles can now be found in retail pharmacies, long-term care facilities and hospitalsthroughout the country.The Environmental Protection Agency (“EPA”) has recently passed regulations that will affect the healthcare industry including the Generator ImprovementRule passed in November 2016 and the Management Standards for Hazardous Waste Pharmaceuticals passed in February 2019 (the “Pharmaceutical Rule”).The Pharmaceutical Rule mandates that healthcare facilities compliantly manage the hazardous waste pharmaceuticals that are generated on their sites andprohibits the “sewering” of any hazardous waste pharmaceutical by healthcare facilities beginning August 2019. As state adoption of these federalregulations occurs over the next 24 months and enforcement of these statutes increases, more companies could turn to solutions such as ours to help managetheir hazardous waste and provide needed regulatory compliance. We believe we are well positioned to benefit given our strict adherence to establishedstandards and extensive documentation and records.10Table of ContentsEnvironmentally-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.A 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.11Table of ContentsMany of our customers who currently use the Sharps Recovery System and TakeAway Recovery System could also benefit from the TakeAway MedicationRecovery System, Medsafe, our hazardous waste solutions, our universal waste solutions or other specialized products. Although currently focused primarilyon the proper management of medical and pharmaceutical wastes generated by medical professionals, pharmacies (including chains and mail order), assistedliving facilities and other related organizations will develop needs for our other product lines as they expand their patient service offerings. As an entrenchedand value-added supplier of 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 $4.1 million for the years ended June 30, 2011 and 2019,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 a 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, 44.9% of U.S. adults received a flu shot and 32.2% of flushots for adults were administered in a retail clinic in 2018. Over the flu seasons from 2011 to 2019, the Company saw growth in six years of 10% to 36%,including a 30% increase in 2019, and declines in three years of 13% to 17%. Despite the volatility, Sharps believes the Retail market should continue tocontribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and otherimmunizations.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. The Company has acquired three route-based pickupservice companies in the Northeast from July 2015 to July 2016. To improve operational efficiencies, the Company has opened offices and transfer stations instrategic locations. Through a combination of acquisitions and organic growth, the Company now offers route-based pickup services in a twenty-four (24)state region of the South, Southeast and Northeast portions of the United States. The Company directly serves more than 12,900 customer locations withroute-based pickup services offered to areas encompassing over 55% of the U.S. population.With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers serving the entire U.S., theCompany offers clients a blended product portfolio to effectively target current and prospective customers with multi-site and multi-sized locationsincluding those that generate larger quantities of medical and hazardous waste. The offering includes a single point of contact, consolidated billing,regulatory support and complete integration of our SharpsTracer system. The Company believes the comprehensive offering will continue to assist theCompany in obtaining larger opportunities whereby the customer has both larger and smaller facilities generating medical waste, used healthcare materialsand hazardous waste resulting in 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 marketing and sales efforts designed to educate professional offices, retail pharmacies and clinics, assisted living and long-term care facilities, home healthcare, government, pharmaceutical manufacturers and other commercial organizations on the benefits of our solutions and theneed for safe, cost-effective and environmentally-friendly methods of medical, pharmaceutical and hazardous waste treatment. We believe that the full-service nature of our offerings and the ease and convenience of our mail- and ship-back delivery system will attract new customers who are not yet aware ofthe services we provide. We believe future growth will be driven by the need for our customers to properly document and track the disposal of their waste tomaintain compliance with new and existing legislation. We believe our understanding of the legislative process and focus on accurate and thoroughelectronic tracking 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.12Table of ContentsOver 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, 2019, two customers represented approximately 27% of revenue. One of these customer also represented approximately 19%, or $1.7 million of the totalaccounts receivable balance at June 30, 2019. For the fiscal year ended June 30, 2018, one customer represented approximately 17% of revenue and 13%, or$0.8 million, of the total accounts receivable balance at June 30, 2018. For the fiscal year ended June 30, 2017, one customer represented approximately 17%of revenue. We may be adversely affected by our dependence on a limited number of high volume customers. Management believes that the risks aremitigated by (i) the contractual relationships with key customers, (ii) the high quality and reputation of the Company and its solution offerings and (iii) thecontinued diversification 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 over the period from June1998 to December 2018, including those applicable to some of the unique design features of our MedSafe solution (patent number US 10,150,613), ourPELLA-DRX waste conversion process (patent numbers US 8,163,045, US 8,100,989, US 8,268,073 and US 4,440,534), our Sharps Secure Needle DisposalSystem (patent numbers US 8,162,139 and US 8,235,883), our unique design features related to the TakeAway Environmental Return System drop-off boxes(patent number US 8,324,443) and our Complete Needle Collection & Disposal System (patent number US 4,463,106). We have patents pending on ourMWMS rapid deployment system and additional features of our MedSafe solution.13Table of ContentsSolely 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 55% 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 2019 as we saw the benefits of our marketing activities in all of our target markets. Revenueincreased 10% to $44 million for the fiscal year ended June 30, 2019 driven by increases in the retail, professional and government markets due mainly toincreased flu shot related orders, increased route-based pickup services, increased order activity for unused medication solutions, including the MedSafe, andtargeted telemarketing initiatives and promotional activities. The increase in revenue and execution of our growth strategies has placed and will continue toplace significant demands on our financial, operational and management resources. In order to continue our growth, we may need at some point to addoperations, administrative and other personnel and to make additional investments in the infrastructure and systems. There can be no assurance that we willbe able to find and train qualified personnel, do so on a timely basis or expand our operations and systems to the extent and in the time required.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.14Table 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, 2019, two customers represented approximately 27% of revenues. One of these customers alsorepresented approximately 19%, or $1.7 million, of the total accounts receivable balance as of June 30, 2019. 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 be15Table 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, transportation 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.16Table of ContentsRestrictions in our Credit Agreement could adversely affect our business, financial condition, results of operations and value of our securities.The Credit Agreement and the Loan Agreement, as defined in Note 5 “Notes Payable and Long-Term Debt” in “Notes to the Consolidated FinancialStatements,” contain affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flow leverage ratio ofno 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 on March 29, 2021 forthe working capital portion of the Credit Agreement, and the Loan Agreement also contain customary events of default which, if uncured, may terminate theagreements and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount available under theagreements. These covenants could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunitiesas they arise.Our ability to comply with the covenants and restrictions contained in the Credit Agreement and the Loan Agreement may be affected by events beyond ourcontrol, including prevailing economic, financial, and industry conditions. If market or other economic conditions deteriorate, our ability to comply withthese covenants may be impaired. A failure to comply with these provisions could result in a default or an event of default. Upon an event of default, unlesswaived, the lenders could elect to terminate commitments, cease making further loans, require cash collateralization of letters of credit, cause its loans tobecome due and payable in full and force us into bankruptcy or liquidation. If the payment of our debt is accelerated, our assets may be insufficient to repaysuch debt in full, and the holders 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 2019, 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.17Table 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 22,000 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 and detect errors or fraud. If we cannot provide reliable financialreports or prevent or detect errors or fraud, 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 with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affectour financial condition, results of operation and access to capital. Because of its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause 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.18Table of ContentsITEM 2. PROPERTIESThe Company utilizes approximately 250,000 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 capital market under the symbol “SMED”. Over the past three years, theCompany’s common stock has had an average trading volume of approximately 22,000 shares traded per month. The table below sets forth the high and lowclosing prices 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, 2018 First Quarter$5.67 $4.17Second Quarter$4.94 $3.75Third Quarter$5.06 $3.96Fourth Quarter$4.75 $3.50Fiscal Year Ending June 30, 2019 First Quarter$3.83 $3.19Second Quarter$4.01 $3.07Third Quarter$4.00 $3.17Fourth Quarter$3.68 $3.23Stockholders: At August 26, 2019, there were 16,137,513, shares of common stock held by approximately 146 holders of record; however, the Companybelieves the number of beneficial owners exceeds this number. The last reported sale of the common stock on August 26, 2019 was $4.19 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.19Table of ContentsSecurities Authorized for Issuance under Equity Compensation Plans:The following equity compensation plan information is provided as of June 30, 2019: 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)1,293,449 $4.26 1,037,862Notes:(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): Year Ended June 30, 20192018201720162015Revenues$44,312$40,141$38,188$33,383$30,902Operating Income (Loss)$447$(577)$(1,187)$5$1,236Net Income (Loss)$214$(672)$(1,293)$13$1,160 Net Income (Loss) per share: Basic$0.01$(0.04)$(0.08)$0.00$0.08Diluted$0.01$(0.04)$(0.08)$0.00$0.07 Total Assets$36,040$33,231$34,464$30,147$29,751Total Debt$1,465$2,002$2,603$—$—Cash$4,512$5,155$4,675$12,435$15,157Working Capital$10,575$10,258$10,488$17,232$19,623Total Stockholders’ Equity$26,126$25,174$25,287$23,843$23,586Notes:•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.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 and "Item 1A, Risk Factors.”RESULTS OF OPERATIONS20Table of ContentsThe following analyzes changes in the consolidated operating results and financial condition of the Company during the years ended June 30, 2019, 2018and 2017, 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, 2019% 2018% 2017%Revenues$44,312100.0 % $40,141100.0 % $38,188100.0 %Cost of revenues31,04270.1 % 28,73971.6 % 26,35169.0 %Gross profit13,27029.9 % 11,40228.4 % 11,83731.0 %SG&A expense12,00327.1 % 11,16827.8 % 12,22332.0 %Depreciation and amortization8201.9 % 8112.0 % 8012.1 %Operating income (loss)4471.0 % (577)(1.4)% (1,187)(3.1)%Other expense(63)(0.1)% (74)(0.2)% (102)(0.3)%Income (loss) before income taxes3840.9 % (651)(1.6)% (1,289)(3.4)%Income tax expense1700.4 % 210.1 % 40.0 %Net income (loss)$2140.5 % $(672)(1.7)% $(1,293)(3.4)%YEAR ENDED JUNE 30, 2019 AS COMPARED TO YEAR ENDED JUNE 30, 2018Total revenues for the fiscal year ended June 30, 2019 of $44.3 million increased by $4.2 million, or 10.4%, from the total revenues for the fiscal year endedJune 30, 2018 of $40.1 million. Billings by market are as follows (in thousands): Year Ended June 30, 2019 2018 VarianceBILLINGS BY MARKET: Professional$15,071 $13,110 $1,961Retail11,481 7,885 3,596Home Health Care7,800 7,989 (189)Pharmaceutical Manufacturer4,146 4,482 (336)Assisted Living2,542 2,515 27Government2,468 2,074 394Environmental290 891 (601)Other1,175 818 357Subtotal44,97339,7645,209GAAP Adjustment *(661) 377 (1,038)Revenue Reported$44,312$40,141$4,171*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. Most of the difference between customer billingsand GAAP revenue is reflected in the Company’s balance sheet as Contract Liability. See Note 2 “Summary of Significant Accounting Policies” in “Notes toConsolidated Financial Statements”.21Table of ContentsThe components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings): Year Ended June 30, 2019 % Total 2018 (3) % TotalBILLINGS BY SOLUTION: Mailbacks$25,162 55.9% $21,895 55.1%Route-based pickup services9,029 20.1% 7,492 18.8%Unused medications6,936 15.4% 5,907 14.9%Third party treatment services290 0.6% 891 2.2%Other (1)3,556 8.0% 3,579 9.0%Total billings$44,973 100.0% $39,764 100.0%GAAP adjustment (2)(661) 377 Revenue reported$44,312 $40,141 (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 GAAP revenue. Customer billings include allinvoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings aswell as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition of certain revenue associatedwith products returned for treatment and destruction and (iii) provisions for certain rebates, product returns and discounts to customers which areaccounted for as reductions in sales in the same period the related sales are recorded. Most of the difference between customer billings and GAAPrevenue is reflected in the Company’s balance sheet as Contract Liability.(3)Certain prior year amounts have been reclassified to conform to current year presentation.The increase in billings was primarily attributable to increased billings in the Retail ($3.6 million), Professional ($2.0 million), and Government ($0.4million) markets. The increase was partially offset by decreased billings in the Environmental ($0.6 million) and Pharmaceutical Manufacturer ($0.3 million)markets. The increase in Retail billings was due mainly to a $2.8 million increase in flu shot-related orders and a $0.8 million increase in MedSafe billings.The increase in Professional market billings reflected 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 pick-up services. The increase in Government marketbillings was due primarily to billings for unused medication related orders. The decrease in Environmental billings was due to lower third party treatmentbillings from our treatment facilities in Texas and Pennsylvania. The decrease in Pharmaceutical Manufacturer billings was mainly due to timing of inventorybuilds for patient support programs. Although there were new pharmaceutical manufacturer programs launched in fiscal 2019, the impact is offset bysignificant inventory builds for larger programs in the first half of fiscal 2018 which did not re-occur in fiscal 2019 due to their significant size. Billings forMailbacks in the year ended June 30, 2019 increased 14.9% to $25.2 million as compared to $21.9 million in 2018 and represented 56% of total billings.Billings for Route-Based Pickup Services increased 21% to $9.0 million in the year ended June 30, 2019 due to organic growth as compared to $7.5 millionin 2018 and represented 20% of total billings. Billings for Unused Medications increased 17% to $6.9 million in the year ended June 30, 2019 as comparedto $5.9 million in 2018 and represented 15% of total billings.Cost of revenue for the year ended June 30, 2019 of $31.0 million was 70.1% of revenue. Cost of revenue for the year ended June 30, 2018 of $28.7 millionwas 71.6% of revenue. The gross margin for the year ended June 30, 2019 of 29.9% increased compared to the gross margin for the year ended June 30, 2018of 28.4%. Gross margin was positively impacted for the year ended June 30, 2019 due to higher revenues than the prior year.Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2019 and 2018 were $12.0 million and $11.2 million, respectively. Theincrease in SG&A expense was due to continued investments in sales and marketing.The Company recorded operating income of $0.4 million for the year ended June 30, 2019 compared to an operating loss of $0.6 million for the year endedJune 30, 2018. The operating income increased mainly due to higher revenue and higher gross margin (discussed above).22Table of ContentsThe Company reported income before income taxes of $0.4 million for the year ended June 30, 2019 compared to loss before income taxes of $0.7 million forthe year ended June 30, 2018. Income before income taxes increased due to the increase in operating income (discussed above).The Company’s effective tax rate for the years ended June 30, 2019 and 2018 was 44.3% and (3.2)%, respectively. The 2019 effective tax rate is primarilydue to deferred tax expense related to indefinite lived assets, such as goodwill, which cannot be used as a source of future taxable income in evaluating theneed for a valuation allowance against deferred tax assets and state income taxes. The 2018 effective tax rate reflects the impact of the 2017 tax law changeon the Company's alternative minimum tax credits net of estimated state income tax expense and deferred tax expenses related to indefinite lived assets.The Company reported a net income of $0.2 million for the year ended June 30, 2019 compared to a net loss of $0.7 million for the year ended June 30, 2018.Net income increased due to the increase in operating income (discussed above).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): 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 55Subtotal39,764 38,133 1,631GAAP 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 GAAP revenue. Customer billings include all invoicedamounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings as well as numerousadjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition of certain revenue associated with products returnedfor treatment and destruction and (iii) provisions for certain rebates, product returns and discounts to customers which are accounted for as reductions insales in the same period the related sales are recorded. Most of the difference between customer billings and GAAP revenue is reflected in the Company’sbalance sheet as Contract Liability. See Note 2 “Summary of Significant Accounting Policies” in “Notes to Consolidated Financial Statements”.23Table of ContentsThe components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings): Year Ended June 30, 2018 (3) % Total 2017 (3) % TotalBILLINGS BY SOLUTION: Mailbacks$21,895 55.1% $24,570 64.4%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)3,579 9.0% 3,425 9.0%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 GAAP revenue. Customer billings include allinvoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings aswell as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition of certain revenue associatedwith products returned for treatment and destruction and (iii) provisions for certain rebates, product returns and discounts to customers which areaccounted for as reductions in sales in the same period the related sales are recorded. Most of the difference between customer billings and GAAPrevenue is reflected in the Company’s balance sheet as Contract Liability.(3)Certain prior year amounts have been reclassified to conform to current year presentation.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% to $21.9 million as compared to $24.6 million in 2017and represented 55% 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 2017and represented 19% of total billings. Billings for Unused Medications increased 75% to $5.9 million inthe year ended June 30, 2018 as compared to $3.4 million in 2017 and represented 15% 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.SG&A expenses for the year ended June 30, 2018 and 2017 were $11.2 million and$12.2 million, respectively. SG&A expenses for the year ended June 30,2017 included $0.7 million of acquisition related costs associated with the completion of the Company’s acquisition of Citiwaste. Without these acquisitionrelated costs, SG&A decreased 3.0% compared to the prior year period due to the Company’s ongoing investment in sales 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).24Table of ContentsPROSPECTS 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 55% ofthe U.S. population.•From July 2015 to July 2016, the Company acquired three route-based pickup service companies, which strengthened the Company's position inthe Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a twenty-four(24) state region of the South, Southeast and Northeast portions of the United States. To facilitate operational efficiencies, the Company has openedtransfer stations and offices in strategic locations. The Company directly serves more than 12,900 customer locations with route-based pickupservices. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing theentire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including thosethat generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of thispipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup serviceare 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"), 44.9% of U.S. adults received a flu shot and32.2% of flu shots for adults were administered in a retail clinic in 2018. Over the flu seasons from 2011 to 2019, the Company saw growth in sixyears of 10% to 36%, including a 30% increase in 2019, and declines in three years of 13% to 17%. Despite the volatility, Sharps believes theRetail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retailpharmacies, 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 fund25Table of Contentsprograms that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for proper medication disposal are beingfunded 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 $4.5 million and debt of $1.5 million (in each case, as of June 30, 2019) andadditional availability under the Credit Agreement.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 decreased by $0.6 million to $4.5 million at June 30, 2019from $5.2 million at June 30, 2018 due to the following:•Cash Flows from Operating Activities - Working capital increased by $0.3 million to $10.6 million at June 30, 2019 from $10.3 million at June 30,2018. Despite the decrease in cash, working capital increased due to the offsetting impacts of :•an increase in accounts receivable of $2.9 million to $9.3 million at June 30, 2019 from $6.4 million at June 30, 2019 due to timing of billingsand collections,•an increase in accounts payable and accrued liabilities of $1.5 million due to purchases and payments to vendors,•an increase in the net contract liability of $0.7 million due to increased revenue for mailbacks and unused medications.•Cash Flows used in Investing Activities - Investing activities include permitting and capital expenditures of $1.0 million for normal plant andequipment additions.•Cash Flows used in Financing Activities – Financing activities include repayments of debt of $0.5 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 for the years ended June 30, 2019, 2018 and2017.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 provides for a $14.026Table of Contentsmillion 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, 2019 was approximately 5.05%. TheCompany pays a fee of 0.25% per annum on the unused amount of the credit facility. At June 30, 2019, $1.5 million was outstanding related to theacquisition portion of the credit facility which matures March 2022. No amounts were outstanding under the working capital portion of the credit facility atJune 30, 2019.The Company has availability under the Credit Agreement of $12.4 million ($5.9 million for the working capital and $6.5 million for the acquisitions) as ofJune 30, 2019. The Company also had $0.1 in letters of credit outstanding as of June 30, 2019.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, 2019.On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master Equipment Finance Agreementwith its existing commercial bank (collectively, the “Loan Agreement”). The Loan Agreement provides for a five-year, $3.2 million facility, the proceeds ofwhich are to be utilized for expenditures to facilitate future growth at the Company’s treatment facility in Carthage, Texas (the “Texas Treatment Facility”) asfollows: (i) $2.0 million for planned improvements and (ii) $1.2 million for equipment. Indebtedness under the Loan Agreement is secured by the Company’sreal estate investment and equipment at the Texas Treatment Facility. Advances under the Loan Agreement mature five years from the Closing Date ("August21, 2019") with monthly payments based on a 20-year amortization for the real estate portion and on a 6-year amortization for the equipment portion of theLoan Agreement. Borrowings during the advancing period for the real estate portion and for the entire term of the equipment portion of the Loan Agreementbear interest computed at the One Month ICE LIBOR, plus two-hundred and fifty (250) basis points which would be a rate of 4.79% on August 21, 2019. TheCompany has entered into a forward rate lock to fix the rate on the real estate portion of the Loan Agreement at the expiration of the advancing period at4.15%.The Loan Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flowleverage ratio and a minimum debt service coverage ratio as described therein consistent with the current Credit Agreement. Both the Credit Agreement andLoan Agreement also contain customary events of the Company's default which, if uncured, may terminate the Credit Agreement or Loan Agreement andrequire, among other things immediate repayment of all indebtedness to the lenders.The Company utilizes performance bonds to support operations based on certain state requirements. At June 30, 2019, the Company had performance bondsoutstanding covering financial assurance up to $1.0 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, 2020 and beyond.27Table of ContentsTreatment 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 54,228 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, net of applicable sales tax, when performance obligations are satisfied through the transfer ofcontrol of promised goods or services to the Company’s customers. Control transfers once a customer has the ability to direct the use of, and obtainsubstantially all of the benefits from, the promised goods or services. Outbound shipping and handling activities to customers are considered fulfillmentactivities with the exception of mailbacks sold as part of the vendor managed inventory ("VMI") program. Shipping and handling are considered separateperformance obligations for mailbacks sold under the VMI program. For performance obligations satisfied at a point in time, which applies to all contractsexcept for route-based pickup services, revenue recognition occurs when there is a transfer of control or completion of service. For performance obligationssatisfied over time, which applies to the route-based pickup services, revenue is recognized in the amount to which the Company has a right to invoicepursuant to the right to invoice practical expedient. Provisions for certain rebates, product returns and discounts to customers are estimated at the inception ofthe contract, updated as needed throughout the contract term, and accounted for as reductions in sales in the same period the related sales are recorded.Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, includingprices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in thevarious markets served.Other than the Company’s mailbacks and unused medication contract categories, the Company’s solutions have a single performance obligation. TheCompany's mailbacks and unused medication solutions have revenue producing components that are recognized over multiple delivery points (SharpsRecovery System and various other solutions like the MedSafe and TakeAway Medication Recovery Systems referred to as “mailbacks” or "unusedmedications") and can consist of up to two performance obligations, or units of measure, as follows: (1) the sale of the compliance and container system, and(2) return transportation and treatment service. For mailbacks that are part of the VMI program, there is an additional element, or unit of measure, foroutbound transportation. For contracts with multiple performance obligations, an estimated stand-alone selling price is determined for all performanceobligations. The consideration is then allocated to the performance obligations based on their relative stand-alone selling price. The selling price forperformance obligations for transportation and treatment utilizes third party evidence. The Company estimates the selling price of the compliance andcontainer system based on the product and services provided, including the expected cost plus a margin.The allocated transaction price for the sale of the compliance and container system is recognized upon delivery to the customer, at which time the customerhas control. The allocated transaction price for the return transportation and treatment revenue is recognized when the customer returns the compliance andcontainer system and the container has been received at the Company’s owned or contracted facilities. The compliance and container system is mailed ordelivered by an alternative logistics provider to the Company’s owned or contracted facilities at which point the destruction or conversion and proof ofreceipt and treatment are performed on the container. Consideration received and allocated to the transportation and treatment performance obligation isrecorded as a contract liability until the services are performed. Through regression analysis of historical data, the Company has determined that a certainpercentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the return transportation and treatment element isrecognized at the point of sale. Furthermore, the current and long-term portions of amounts historically referred to deferred revenues (shown as ContractLiability on the condensed consolidated balance sheets) are determined through regression analysis and historical trends.28Table of ContentsThe VMI program includes terms that meet the “bill and hold” criteria and as such are recognized when the order is placed, title has transferred, there are noacceptance provisions and amounts are segregated in the Company’s warehouse for the customer.The contract asset is related to VMI service agreements within the mailbacks contract type category when the revenue recognition exceeds the amount ofconsideration the Company was entitled to at the point in time of satisfying the performance obligation associated with the sale of the compliance andcontainer system. The contract liability is related to the mailbacks and unused medications contract type categories in which cash consideration exceeds thetransaction price allocated to completed performance obligations. Incremental costs to obtain contracts that are deemed to be recoverable under the newaccounting guidance, primarily related to the payment of sales incentives for contracts in the route-based pickup service category, are capitalized as contractcosts and included in prepaids and other current assets.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, contained significant changes to U.S. Tax law, including lowering the U.S. corporate taxrate to 21% and the repeal of the corporate alternative minimum tax for tax years beginning on or after January 1, 2018. Other provisions in the 2017 taxreform such 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. Given the repeal of the corporatealternative minimum tax, existing alternative minimum tax credit carryovers are to be refunded beginning in 2018. Therefore, a deferred tax asset is recordedfor $0.1 million as of June 30, 2019 and no valuation allowance is in place related to this deferred tax asset. The deferred tax asset is offset by deferred taxliabilities related to indefinite lived assets, such as goodwill, in the amount of $0.3 million, which cannot be used as a source of future taxable income inevaluating the need for a valuation allowance against deferred tax assets for a net deferred tax liability of $0.2 million. A deferred tax asset of $0.2 millionwas recorded as of June 30, 2018 for the alternative minimum tax credit carryforward which was offset by deferred tax liabilities related to indefinite livedassets, such as goodwill, in the amount of $0.2 million for a net deferred tax asset of $8,000.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 30,2019, 2018 and 2017.RECENTLY ISSUED ACCOUNTING STANDARDSIn February 2016, guidance for leases was issued, which requires balance sheet recognition of lease assets and lease liabilities for all leases. The new guidancealso requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance areeffective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), including interim periods within the reportingperiod, and early application is permitted. The Company has substantially completed its analysis to evaluate the impact that the new guidance will have onits consolidated financial statements and related disclosures. The Company intends to adopt the standard using the modified29Table of Contentsretrospective approach and recognize a cumulative effect adjustment to assets and liabilities for existing leases as of July 1, 2019. As a result of our analysis,the Company determined the following:•Approximately 50 leases have been identified, substantially all of which are expected to be classified as operating leases. For these real estate,equipment and vehicle operating leases, we expect to recognize new right of use (“ROU”) assets and lease liabilities on our balance sheet.•The Company intends to apply the package of practical expedients to not reassess prior conclusions related to (i) contracts containing leases, (ii)lease classification and (iii) initial direct costs. The Company will not adopt the practical expediency surrounding the use of hindsight to determinelease term, termination and purchase options, or in assessing impairment of ROU assets.•The Company also intends to make the accounting policy election for short-term leases, or leases with terms of twelve months or less, therefore thelease payments will be recorded as an expense on a straight-line basis over the lease term with no ROU asset or lease liability recorded.•The Company has elected to exclude non-lease components of a lease arrangement from the ROU asset and liability for certain asset classes such asreal estate and field equipment leases but will include non-lease components of a lease arrangement in the ROU asset and liability for officeequipment and automobiles.•The Company has engaged a third-party service provider to assist in its implementation of the new lease standard, including implementation of thesoftware package offered by the service provider to manage, account for and develop disclosures for leases under the new guidance.On adoption, we currently expect to recognize additional operating liabilities ranging from $4.0 million to $5.0 million, with corresponding ROU assets ofthe same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.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, 2019 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, 2019.Changes in Internal ControlsDuring the quarter ended June 30, 2019, 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 financial30Table of Contentsreporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the UnitedStates.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, 2019. 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, 2019, the Company’s internal control over financialreporting was effective based on those criteria.ITEM 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 21, 2019.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 21, 2019.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 21, 2019.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 21, 2019.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 21, 2019.31Table 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).3.3Certificate of Amendment to Amended and Restated Certificate of Incorporation (filed herewith).3.4Amended 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 Exhibit 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). *32Table 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(incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report Form 10-K, filed on August 22, 2018).10.22Fifth Amendment to Lease Agreement dated August 21, 2019, between Sharps Compliance, Inc. and IND HOUTEX TTP Legacy, LLC(incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K, filed on August 23, 2019.10.23Construction and Term Loan Agreement dated August 21, 2019, between Sharps Environmental Services, Inc. and a commercial bank(incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on August 23, 2019).10.24Master Equipment Finance Agreement dated August 21, 2019, between Sharps Environmental Services, Inc. and a commercial bank(incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed on August 23, 2019).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).32.1+Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act.32.2+Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act.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.+This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended("Exchange Act"), or otherwise subject to the liability of that section, nor shall it be deemed incorporated byreference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.ITEM 16. FORM 10-K SUMMARYNone.33Table 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 28, 2019By: /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 28, 2019By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President and Director (Principal Executive Officer) Dated: August 28, 2019By: /s/ DIANA P. DIAZ Diana P. Diaz Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: August 28, 2019By: /s/ F. GARDNER PARKER F. Gardner Parker Director Dated: August 28, 2019By: /s/ JOHN W. DALTON John W. Dalton Director Dated: August 28, 2019By: /s/ PARRIS H. HOLMES Parris H. Holmes Director Dated: August 28, 2019By: /s/ SHARON R. GABRIELSON Sharon R. Gabrielson Chair of the Board of Directors34Table 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, 2019 and 2018F-3Consolidated Statements of Operations for the Years Ended June 30, 2019, 2018 and 2017F-4Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2019, 2018 and 2017F-5Consolidated Statements of Cash Flows for the Years Ended June 30, 2019, 2018 and 2017F-6Notes to Consolidated Financial StatementsF-7F-1Table 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. (the “Company") as of June 30, 2019 and 2018, the relatedconsolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2019, and the relatednotes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all materialrespects, the financial position of the Company at June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in theperiod ended June 30, 2019, in conformity with accounting principles generally accepted in the United States 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 28, 2019F-2Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share and par value amounts) June 30, 2019 2018ASSETS CURRENT ASSETS Cash$4,512 $5,155Accounts receivable, net9,289 6,370Inventory3,770 3,986Contract asset260 —Prepaid and other current assets922 739TOTAL CURRENT ASSETS18,753 16,250PROPERTY, PLANT AND EQUIPMENT, net5,867 6,572INVENTORY, net of current portion1,046 —OTHER ASSETS443 149GOODWILL6,735 6,735INTANGIBLE ASSETS, net3,196 3,525TOTAL ASSETS$36,040 $33,231LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable$2,946 $1,500Accrued liabilities2,213 2,061Current maturities of long-term debt517 537Contract liability2,502 1,894TOTAL CURRENT LIABILITIES8,178 5,992CONTRACT LIABILITY, net of current portion503 470OTHER LIABILITIES42 130DEFERRED TAX LIABILITY243 —LONG-TERM DEBT, net of current portion948 1,465TOTAL LIABILITIES9,914 8,057COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS’ EQUITY Common stock, $0.01 par value per share; 40,000,000 and 20,000,000 shares authorized, respectively;16,433,128 and 16,377,636 shares issued, respectively, and 16,137,513 and 16,082,021 shares outstanding,respectively165 164Treasury stock, at cost, 295,615 shares repurchased(1,554) (1,554)Additional paid-in capital29,020 28,621Accumulated deficit(1,505) (2,057)TOTAL STOCKHOLDERS’ EQUITY26,126 25,174TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$36,040 $33,231See accompanying notes to consolidated financial statementsF-3Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per-share data) Year Ended June 30, 2019 2018 2017REVENUES$44,312 $40,141 $38,188Cost of revenues31,042 28,739 26,351GROSS PROFIT13,270 11,402 11,837Selling, general and administrative12,003 11,168 12,223Depreciation and amortization820 811 801OPERATING INCOME (LOSS)447 (577) (1,187)OTHER INCOME (EXPENSE) Interest income24 20 13Interest expense(87) (94) (115)TOTAL OTHER EXPENSE(63) (74) (102)INCOME (LOSS) BEFORE INCOME TAXES384 (651) (1,289)INCOME TAX EXPENSE (BENEFIT) Current(81) 29 4Deferred251 (8) —TOTAL INCOME TAX EXPENSE170 21 4NET INCOME (LOSS)$214 $(672) $(1,293)NET INCOME (LOSS) PER COMMON SHARE Basic and Diluted$0.01 $(0.04) $(0.08)WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PERCOMMON SHARE: Basic16,116 16,055 15,949Diluted16,123 16,055 15,949See accompanying notes to consolidated financial statementsF-4Table 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, 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) 25,174Stock-based compensation — — — — 400 — 400Issuance of restricted stock 55,492 1 — — (1) — —Cumulative effect of new accounting standard(Note 2) — — — — — 338 338Net income — — — — — 214 214Balances, June 30, 2019 16,433,128 $165 (295,615) $(1,554) $29,020 $(1,505) $26,126See accompanying notes to consolidated financial statementsF-5Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended June 30, 2019 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)$214 $(672) $(1,293) Adjustments to reconcile net income (loss) to net cash provided by (used in) operatingactivities: Depreciation and amortization1,663 1,561 1,485 Bad debt expense81 62 20 Non-cash lease expense46 37 — Inventory write-offs55 — — Loss on disposal of property, plant and equipment21 13 10 Stock-based compensation expense400 476 496 Deferred tax expense (benefit)251 (8) — Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable(3,000) 1,121 (1,264) Inventory(492) 305 (61) Prepaid and other assets(531) (20) (35) Accounts payable and accrued liabilities1,498 29 125 Contract asset and contract liability719 (535) (61) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES925 2,369 (578) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment(749) (1,212) (2,486) Cash proceeds from sale of property, plant and equipment— 10 23 Additions to intangible assets(282) (86) (163) Payments for business acquisition, net of cash acquired— — (7,314) NET CASH USED IN INVESTING ACTIVITIES(1,031) (1,288) (9,940) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options— — 342 Repayments of long-term debt(537) (601) (3,184) Proceeds from long-term debt— — 5,600 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES(537) (601) 2,758 NET INCREASE (DECREASE) IN CASH(643) 480 (7,760) CASH, beginning of year5,155 4,675 12,435 CASH, end of year$4,512 $5,155 $4,675 SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid$37 $3 $9 Interest paid on long-term debt$89 $87 $107 NON-CASH INVESTING ACTIVITIES: Issuance of common stock for acquisition$— $— $1,899 Issuance of common stock for lease$— $83 $— Transfer of equipment to inventory$393 $193 $118 Property, plant and equipment financed through accounts payable$12 $(13) $28See accompanying notes to consolidated financial statementsF-6Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017NOTE 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-four (24) 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, 2019, two customers represented approximately 27% of revenues. One of these customers also representedapproximately 19%, or $1.7 million, of the total accounts receivable balance as of June 30, 2019. For the fiscal year ended June 30, 2018, one customerrepresented approximately 17% of revenues and 13%, or $0.8 million, of the total accounts receivable balance as of June 30, 2018. For the fiscal year endedJune 30, 2017, one customer represented approximately 17% of revenues. In the event a major customer is lost, the Company may be adversely affected by itsdependence on a limited number of high volume customers.Currently, the majority of Sharps transportation is sourced with the United States Postal Service (“USPS”), which consists of delivering the Sharps 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: In May 2014 and as subsequently amended, guidance for revenue recognition was issued which supersedes the revenue recognitionrequirements previously followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount andtiming of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that willenable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The Company adopted thestandard on July 1, 2018 using the modified retrospective approach, which involves retrospectively adopting the standard by recording a cumulative effectadjustment for all uncompleted contracts at July 1, 2018. This cumulative effect was $0.3 million which decreased accumulated deficit (and increasedstockholders' equity) and increased contract assets by $0.3 million. The impact that the new accounting guidance had on its consolidated financialstatements and related disclosures included 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 new revenue recognitionguidance. The impact of this was not 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 was not material.•The new guidance changed the timing of revenue recognition on certain of the Company’s vendor managed inventory contracts. This constituted amaterial portion of the cumulative effect noted above as under the new guidance, revenue recognition is no longer limited to the amounts that maybe billed to the customer at the point in time in which performance obligations are satisfied.F-7Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017•The Company made a number of practical expedient elections related to the new accounting guidance, including: (i) right to invoice practicalexpedient that allows revenue for route-based pickup services to be recognized in the amount to which the Company has a right to invoice overtime; (ii) sales and use taxes have been excluded from the transaction price; (iii) for incremental costs to obtain a contract that would be recognizedover one year or less, the Company expenses those costs as incurred; and (iv) at the implementation date, new guidance was applied only tocontracts that were not completed as of the date of initial application.The components of revenues by solution which reflect a disaggregation of revenue by contract type are as follows (dollar amounts in thousands): Year Ended June 30, 2019 % Total 2018(2) % Total 2017(2) % TotalREVENUES BY SOLUTION: Mailbacks$24,501 55.2% $22,272 55.5% $24,625 64.5%Route-based pickup services9,029 20.4% 7,492 18.7% 6,348 16.6%Unused medications6,936 15.7% 5,907 14.7% 3,377 8.8%Third party treatment services290 0.7% 891 2.2% 413 1.1%Other (1)3,556 8.0% 3,579 8.9% 3,425 9.0%Total revenues$44,312 100.0% $40,141 100.0% $38,188 100.0%(1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items with single performanceobligations.(2)Certain prior year amounts have been reclassified to conform to current year presentation.The Company recognizes revenue, net of applicable sales tax, when performance obligations are satisfied through the transfer of control of promised goods orservices to the Company’s customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from,the promised goods or services. Outbound shipping and handling activities to customers are considered fulfillment activities with the exception of mailbackssold as part of the vendor managed inventory ("VMI") program. Shipping and handling are considered separate performance obligations for mailbacks soldunder the VMI program. For performance obligations satisfied at a point in time, which applies to all contracts except for route-based pickup services,revenue recognition occurs when there is a transfer of control or completion of service. For performance obligations satisfied over time, which applies to theroute-based pickup services, revenue is recognized in the amount to which the Company has a right to invoice pursuant to the right to invoice practicalexpedient. Provisions for certain rebates, product returns and discounts to customers are estimated at the inception of the contract, updated as neededthroughout the contract term, and accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are basedon the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors.Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served.Other than the Company’s mailbacks and unused medication solutions, the Company’s solutions have a single performance obligation. The Company'smailbacks and unused medication solutions have revenue producing components that are recognized over multiple delivery points (Sharps Recovery Systemand various other solutions like the MedSafe and TakeAway Medication Recovery Systems referred to as “mailbacks” or "unused medications") and canconsist of up to two performance obligations, or units of measure, as follows: (1) the sale of the compliance and container system, and (2) return transportationand treatment service. For mailbacks that are part of the VMI program, there is an additional element, or unit of measure, for outbound transportation. Forcontracts with multiple performance obligations, an estimated stand-alone selling price is determined for all performance obligations. The consideration isthen allocated to the performance obligations based on their relative stand-alone selling price. The selling price for performance obligations fortransportation and treatment utilizes third party evidence. The Company estimates the selling price of the compliance and container system based on theproduct and services provided, including the expected cost plus a margin.The allocated transaction price for the sale of the compliance and container system is recognized upon delivery to the customer, at which time the customerhas control. The allocated transaction price for the return transportation and treatment revenue isF-8Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017recognized when the customer returns the compliance and container system and the container has been received at the Company’s owned or contractedfacilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities atwhich point the destruction or conversion and proof of receipt and treatment are performed on the container. Consideration received and allocated to thetransportation and treatment performance obligation is recorded as a contract liability until the services are performed. Through regression analysis ofhistorical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, aportion of the return transportation and treatment element is recognized at the point of sale. Furthermore, the current and long-term portions of amountshistorically referred to deferred revenues (shown as Contract Liability on the condensed consolidated balance sheets) are determined through regressionanalysis and historical trends.The VMI program includes terms that meet the “bill and hold” criteria and as such are recognized when the order is placed, title has transferred, there are noacceptance provisions and amounts are segregated in the Company’s warehouse for the customer. For the fiscal years ended June 30, 2019 and 2018, theCompany recorded billings from inventory builds that are held in vendor managed inventory under these service agreements of $2.7 million and $2.4million, respectively. As of June 30, 2019 and 2018, $1.9 million and $2.1 million, respectively, of solutions sold through that date were held in vendormanaged inventory pending fulfillment or shipment to patients of pharmaceutical manufacturers who offer these solutions to patients in an ongoing patientsupport program.The impact of adopting the new accounting guidance on the Company's consolidated balance sheet as of June 30, 2019 was as follows (in thousands): June 30, 2019 As ReportedAdjustmentsBalance WithoutAdoptionCurrent contract asset$260$(260)$—Prepaid and other current assets922(49)873Total current assets18,753(309)18,444Total assets36,040(309)35,731Current contract liability(1)2,502(27)2,475Total current liabilities8,178(27)8,151Contract liability, net of current portion(1)503—503Total liabilities9,914(27)9,887Accumulated deficit(1,505)(282)(1,787)Total stockholders' equity26,126(282)25,844Total liabilities and stockholders' equity$36,040$(309)$35,731(1): Prior period contract liabilities were referred to as deferred revenue.F-9Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017The impact of adopting the new accounting guidance on the Company's consolidated statement of operations for the year ended June 30, 2019 was as follows(in thousands): Year Ended June 30, 2019 As ReportedAdjustmentsBalance WithoutAdoptionRevenues $44,312$267$44,579Cost of revenues 31,04216231,204Gross profits 13,27010513,375Selling, general and administrative 12,0034912,052Operating income 44756503Net income $214$56$270The estimated timing of recognition of amounts included at June 30, 2019 are as follows: for the twelve months ending June 30, 2020 - contract asset of $0.3million and contract liability of $2.5 million and for the twelve months ending June 30, 2021 - contract liability of $0.5 million. The contract asset is relatedto VMI service agreements within the mailbacks contract type category when the revenue recognition exceeds the amount of consideration the Company wasentitled to at the point in time of satisfying the performance obligation associated with the sale of the compliance and container system. The contract liabilityis related to the mailbacks and unused medications contract type categories in which cash consideration exceeds the transaction price allocated to completedperformance obligations. Incremental costs to obtain contracts that are deemed to be recoverable under the new accounting guidance, primarily related to thepayment of sales incentives for contracts in the route-based pickup service category, are capitalized as contract costs and included in prepaids and othercurrent assets in the amount of $59 thousand for the year ended June 30, 2019. The amortization of capitalized sales incentives, which is included in selling,general and administrative expense, totaled $10 thousand for the year ended June 30, 2019.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, 2019, 2018 and2017. 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, 2016 and after•State of Texas – fiscal years ended June 30, 2014 and after•State of Georgia – fiscal years ended June 30, 2016 and after•State of Pennsylvania – fiscal years ended June 30, 2016 and after•Other States – fiscal years ended June 30, 2015 and afterF-10Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017None 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 the years ended June 30, 2019, 2018 and 2017.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 with the customer. The Company maintains an allowance fordoubtful accounts to reflect the likelihood of not collecting certain accounts receivable based on past collection history and specific risks identified amonguncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not becollected and/or when the account has been referred to a third-party collection agency. See rollforward of allowance activity below:Allowance for DoubtfulAccounts BalanceBeginningof Year Charges toExpense Write-offs/Recoveries Balance Endof Year 2019 $102 $81 $(51) $1322018 $78 $62 $(38) $1022017 $63 $20 $(5) $78Stock-Based Compensation: Stock-based compensation cost for options and restricted stock awarded to employees and directors is measured at the grant datebased on the calculated fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equitygrant). Total stock-based compensation expense for the fiscal years ended June 30, 2019, 2018 and 2017 are as follows: Year Ended June 30, 2019 2018 2017Stock-based compensation expense included in: Cost of revenue$9 $43 $41Selling, general and administrative391 433 455Total$400 $476 $496The 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, 2019 2018 2017Weighted average risk-free interest rate2.6% 1.2% 1.1%Weighted average expected volatility44% 48% 47%Weighted average expected life (in years)3.08 3.03 5.15Dividend yield— — —The Company considers an estimated forfeiture rate for stock options based on historical experience and the anticipated forfeiture rates during the futurecontract life.F-11Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017Cash: 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 in price levels and other causes. At June 30, 2019, total inventory was$4.8 million of which $3.5 million was finished goods, and $1.3 million was raw materials. At June 30, 2018, total inventory was $4.0 million of which $2.7million was finished goods, and $1.3 million was raw materials. The current portion of inventory was $3.8 million which includes amounts which theCompany expects to sell in the next twelve month period based on historical sales. Total write-offs for the fiscal year ended June 30, 2019 were $0.1 millionand were included in cost of goods sold. There were no write-offs of inventory for the fiscal years ended June 30, 2018 and 2017.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.Impairment 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, 2019, 2018 and 2017.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 30,2019, 2018 and 2017.Intangible Assets: Intangible assets consist of (i) acquired customer relationships, (ii) permit costs related to the Company’s treatment facilities and transferstations, (iii) twelve patents and (iv) defense costs related to certain existing patents.Accrued Liabilities: The components of Accrued Liabilities on the balance sheet as of June 30, 2019 and 2018 are as follows:F-12Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017 As of June 30, 2019 2018Accrued payroll$376 $389Customer-related payables341 334Accrued rebates493 327Other1,003 1,011Total$2,213 $2,061Shipping 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.Advertising Costs: Advertising costs are charged to expenses when incurred and totaled $0.9 million, $0.7 million and $0.8 million for the fiscal years endedJune 30, 2019, 2018 and 2017, respectively.Research 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, 2019, 2018 and2017.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, 2019, 2018 and 2017, 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, 2019 and 2018 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, 2019, 2018 and 2017 for cash awards pursuant to theplan.Net Income (Loss) Per Share: Basic earnings per share excludes dilution and is determined by dividing net income (loss) by the weighted average number ofcommon shares outstanding including participating securities during the period. Diluted EPS reflects the potential dilution that could occur if securities andother contracts to issue common stock were exercised or converted into common stock.Fair Value of Financial Instruments: The Company considers the fair value of all financial instruments, including cash, accounts receivable and accountspayable to approximate their carrying values at year-end due to their short-term nature. The carrying value of the Company’s debt approximates fair valuedue 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. In accordance with GAAP, the methodology for categorizing assets andliabilities that are measured at fair value pursuant to this hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowestlevels 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 year ended June 30, 2017utilized 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.F-13Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017Use 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.Recently Issued Accounting Standards:In February 2016, guidance for leases was issued, which requires balance sheet recognition of lease assets and lease liabilities for all leases. The new guidancealso requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance areeffective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), including interim periods within the reportingperiod, and early application is permitted. The Company has substantially completed its analysis to evaluate the impact that the new guidance will have onits consolidated financial statements and related disclosures. The Company intends to adopt the standard using the modified retrospective approach andrecognize a cumulative effect adjustment to assets and liabilities for existing leases as of July 1, 2019. As a result of our analysis, the Company determinedthe following:•Approximately 50 leases have been identified, substantially all of which are expected to be classified as operating leases. For these real estate,equipment and vehicle operating leases, we expect to recognize new right of use (“ROU”) assets and lease liabilities on our balance sheet.•The Company intends to apply the package of practical expedients to not reassess prior conclusions related to (i) contracts containing leases, (ii)lease classification and (iii) initial direct costs. The Company will not adopt the practical expediency surrounding the use of hindsight to determinelease term, termination and purchase options, or in assessing impairment of ROU assets.•The Company also intends to make the accounting policy election for short-term leases, or leases with terms of twelve months or less, therefore thelease payments will be recorded as an expense on a straight-line basis over the lease term with no ROU asset or lease liability recorded.•The Company has elected to exclude non-lease components of a lease arrangement from the ROU asset and liability for certain asset classes such asreal estate and field equipment leases but will include non-lease components of a lease arrangement in the ROU asset and liability for officeequipment and automobiles.On adoption, we currently expect to recognize additional operating liabilities ranging from $4.0 million to $5.0 million, with corresponding ROU assets ofthe same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.NOTE 3 – PROPERTY, PLANT AND EQUIPMENTAt June 30, 2019 and 2018, property, plant and equipment consisted of the following (in thousands): June 30, Useful Life 2019 2018Furniture and fixtures 3 to 5 years $245 $245Plant and equipment 3 to 17 years 8,683 8,241Manufacturing 15 years 169 169Computers and software 3 to 5 years 2,179 2,064Leasehold improvements Life of Lease 2,792 2,729Land 19 19Construction-in-progress 275 716 14,362 14,183Less: accumulated depreciation 8,495 7,611Net property, plant and equipment $5,867 $6,572F-14Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017Total depreciation expense in the fiscal years ended June 30, 2019, 2018 and 2017 was $1.1 million, $1.0 million and $0.9 million, respectively.Depreciation expense included in cost of revenues in the fiscal years ended 2019, 2018 and 2017 was $0.8 million, $0.8 million and $0.7 million,respectively.NOTE 4 – INCOME TAXESThe components of income tax expense (benefit) are as follows (in thousands): Year ended June 30, 2019 2018 2017Current: Federal$(123) $— $—State42 29 4Total Current$(81) $29 $4 Deferred: Federal$217 $(8) $—State34 — —Total Deferred251 (8) —Net Income Tax Expense$170 $21 $4The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended June 30, 2019, 2018 and 2017 is asfollows: Year Ended June 30, 2019 2018 2017Statutory rate21.0 % 27.6 % 34.0 %State income taxes, net22.9 % (3.7)% (4.5)%Impact of 2017 tax reform— % (107.0)% — %Meals and entertainment2.7 % (1.8)% (1.5)%Stock-based compensation16.1 % 22.6 % — %Research and development credits7.3 % 22.4 % — %Other1.5 % (2.0)% 0.2 %Effective rate before valuation allowance71.5 % (41.9)% 28.2 %Change in valuation allowance(27.2)% 38.7 % (28.5)%Effective tax rate44.3 % (3.2)% (0.3)%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-15Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017At June 30, 2019 and 2018, the significant components of deferred tax assets and liabilities are as follows (in thousands): June 30, 2019 2018Deferred tax assets relating to: Stock-based compensation$261 $283AMT and research and development credits517 668Deferred rent41 58Inventory158 147Professional fees124 91Accrued vacation27 31Accounts receivable allowance33 26Contribution carryovers8 13Net operating loss carryforwards1,067 1,153Total deferred tax assets2,236 2,470Deferred tax liabilities related to depreciable and amortizable assets(728) (587)Deferred tax liabilities related to other items(63) —Net deferred tax assets before valuation allowance1,445 1,883Valuation allowance(1,688) (1,875)Net deferred tax (liability) asset$(243) $8At June 30, 2019, the Company had net operating loss carryforwards of $5.0 million, which will expire, if unused, between June 30, 2032 and June 30, 2038.At June 30, 2019, the Company had various tax credit carryforwards of $0.5 million, of which $0.4 million will expire beginning on June 30, 2030 and $0.1million 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, contained significant changes to U.S. tax law, including lowering the U.S. corporate taxrate to 21% and the repeal of the corporate alternative minimum tax for tax years beginning on or after January 1, 2018. Other provisions in the 2017 taxreform such 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. Given the repeal of the corporatealternative minimum tax, existing alternative minimum tax credit carryovers are to be refunded beginning in 2018. Therefore, a deferred tax asset is recordedfor $0.1 million as of June 30, 2019 and no valuation allowance is in place related to this deferred tax asset. The deferred tax asset is offset by deferred taxliabilities related to indefinite lived assets, such as goodwill, in the amount of $0.3 million, which cannot be used as a source of future taxable income inevaluating the need for a valuation allowance against deferred tax assets for a net deferred tax liability of $0.2 million. A deferred tax asset of $0.2 millionwas recorded as of June 30, 2018 for the alternative minimum tax credit carryforward which was offset by deferred tax liabilities related to indefinite livedassets, such as goodwill, in the amount of $0.2 million for a net deferred tax asset of $8,000.NOTE 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 (“the Credit Agreement”). The Credit Agreement, provides for a $14.0 million credit facility, the proceeds of which may beutilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and general corporate purposes and (ii) $8.0 million foracquisitions. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets with advances outstanding under the workingcapital portion of the credit facility at any time limited to a Borrowing Base (as defined in the Credit Agreement) equal to 80% of eligible accountsreceivable plus the lesser of (i) 50% of eligible inventory and (ii) $3.0 million. Advances under the acquisition portion of the credit facility are limited to75% of the purchase price of an acquired company and convert to a five-year term note at the time of the borrowing. 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 Margin may increase to as high as 3.0% depending on theCompany’s cash flow leverage ratio. The interest rate as of June 30, 2019 was approximately 5.05%. The Company pays a fee of 0.25% per annum on theunused amount of the credit facility.F-16Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017At June 30, 2019, long-term debt consisted of the following (in thousands): Acquisition loan, bearing interest at 5.05%, monthly payments of $43; maturing March 2022.$1,465Less: current portion517Long-term debt, net of current portion$948The Company has availability under the Credit Agreement of $12.4 million ($5.9 million for the working capital portion and $6.5 million for theacquisitions) as of June 30, 2019. The Company also has $0.1 million in letters of credit outstanding as of June 30, 2019.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, 2019.Payments due on long-term debt over the five years subsequent to June 30, 2019 are as follows (in thousands):Twelve Months Ending June 30, 2020$51720215172022431 $1,465On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master Equipment Finance Agreementwith its existing commercial bank (collectively, the “Loan Agreement”). The Loan Agreement provides for a five-year, $3.2 million facility, the proceeds ofwhich are to be utilized for expenditures to facilitate future growth at the Company’s treatment facility in Carthage, Texas (the “Texas Treatment Facility”) asfollows: (i) $2.0 million for planned improvements and (ii) $1.2 million for equipment. Indebtedness under the Loan Agreement is secured by the Company’sreal estate investment and equipment at the Texas Treatment Facility. Advances under the Loan Agreement mature five years from the Closing Date ("August21, 2019") with monthly payments based on a 20-year amortization for the real estate portion and on a 6-year amortization for the equipment portion of theLoan Agreement. Borrowings during the advancing period for the real estate portion and for the entire term of the equipment portion of the Loan Agreementbear interest computed at the One Month ICE LIBOR, plus two-hundred and fifty (250) basis points which would be a rate of 4.79% on August 21, 2019. TheCompany has entered into a forward rate lock to fix the rate on the real estate portion of the Loan Agreement at the expiration of the advancing period at4.15%.The Loan Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flowleverage ratio and a minimum debt service coverage ratio as described therein consistent with the current Credit Agreement. Both the Credit Agreement andLoan Agreement also contain customary events of the Company's default which, if uncured, may terminate the Credit Agreement or Loan Agreement andrequire, among other things immediate repayment of all indebtedness to the lenders.NOTE 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, 2019,2018 and 2017, no shares were repurchased. Total 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, 2019 and 2018 was $46,000 and $37,000, respectively. F-17Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017On November 15, 2018, the Company's stockholders approved an amendment to the Company's certificate of incorporation to increase the authorized sharesof common stock from 20,000,000 to 40,000,000 shares.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 1,293,449 options and restricted shares are outstanding as of June 30, 2019. 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, 2019, there were 1,037,862 options available for grantunder the 2010 Plan.The summary of activity for all restricted stock during the fiscal years ended June 30, 2019, 2018 and 2017 is presented in the table below (in thousands): Year ended June 30, 2019 2018 2017 Unvested at beginning of the year13 13 13Granted63 53 53Vested(55) (53) (53)Forfeited(8) — —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, 2019, 2018 and 2017 was $3.53, $4.17 and $4.38,respectively. The weighted average fair value per share of restricted stock which vested during the fiscal years ended June 30, 2019, 2018 and 2017 was$3.69, $4.22 and $5.29, respectively.The summary of activity for all stock options during the fiscal years ended June 30, 2019, 2018 and 2017 is presented in the table below (in thousands exceptper share amounts): OptionsOutstanding WeightedAverageExercisePriceOptions 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 $4.57Granted578 $3.73Forfeited or canceled(218) $4.16 Options Outstanding at June 30, 20191,280 $4.26 Options Exercisable at June 30, 2019591 $4.67F-18Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017The following table summarizes information about stock options outstanding as of June 30, 2019 (in thousands except per share amounts): Options OutstandingRange of ExercisePrice Outstanding as ofJune 30, 2019 WeightedAverageRemainingLife (in Years) WeightedAverageExercisePrice $2.51 - $3.75 107 4.77 $3.18$3.76 - $5.00 1,044 4.70 $4.17$5.01 - $7.50 129 2.81 $5.95 1,280 $4.26The following table summarizes information about stock options exercisable as of June 30, 2019 (in thousands except per share amounts): Options ExercisableRange of ExercisePrice Exercisable as ofJune 30, 2019 WeightedAverageRemainingLife (in Years) WeightedAverageExercisePrice $2.51 - $3.75 32 0.57 $2.92$3.76 - $5.00 437 2.41 $4.45$5.01 - $7.50 122 2.78 $5.90 591 $4.67As of June 30. 2019, there was $0.6 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 3.4 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, 2019, 2018 and 2017 was $2.2 million, $2.0 million and $1.5 million, respectively. Future minimum leasepayments under non-cancelable operating leases as of June 30, 2019 are as follows (in thousands): Year Ended June 30, 2020 2021 2022 2023 2024 TotalOperating lease obligations$2,059 $1,322 $532 $155 $38 $4,106On August 21, 2019, the Company amended the corporate office lease agreement pursuant to the lease agreement originally dated July 13, 2006. This fifthamendment to the lease extends the term of the lease from February 29, 2020 to February 28, 2025 and sets base rent amounts for the extended term of thelease (“Extended Term”). The blended base rent for the first year of the Extended Term is $14.00 per square foot with subsequent annual increases of 3%. Thefuture minimum lease payments for the extended lease will be an additional $0.1 million, $0.3 million, $0.4 million, $0.4 million, $0.4 million and $0.3million for fiscal years ending June 30, 2020, 2021, 2022, 2023, 2024 and 2025, respectively.F-19Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2017, 2016 and 2015NOTE 8- COMMITMENTS AND CONTINGENCIES (continued)Performance Bonds: The Company utilizes performance bonds to support operations based on certain state requirements. At June 30, 2019, the Company hadperformance bonds outstanding covering financial assurance up to $1.0 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 and diluted EPS using the two-class method. For the periods presented, the amount of earnings allocated to theparticipating securities 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, 2019 2018 2017 Net income (loss), as reported$214 $(672) $(1,293) Weighted average common shares outstanding16,116 16,055 15,949Effect of dilutive stock options7 — —Weighted average diluted common shares outstanding16,123 16,055 15,949 Net income (loss) per common share Basic and diluted$0.01 $(0.04) $(0.08) Employee stock options excluded from computation of diluted income per share amountsbecause their effect would be anti-dilutive1,173 402 304NOTE 10 – GOODWILL AND INTANGIBLE ASSETSAt June 30, 2019 and 2018, intangible assets consisted of the following (in thousands): June 30, 2019 2018 EstimatedUseful LivesOriginalAmount AccumulatedAmortization NetAmount OriginalAmount AccumulatedAmortization NetAmount Customerrelationships7 years$3,007 $(1,348) $1,659 $3,007 $(919) $2,088Permits6 - 15 years1,704 (492) 1,212 1,459 (390) 1,069Patents5 - 17 years420 (296) 124 383 (278) 105Tradename7 years270 (116) 154 270 (77) 193Non-compete5 years117 (70) 47 117 (47) 70Total intangibleassets, net $5,518 $(2,322) $3,196 $5,236 $(1,711) $3,525F-20Table of ContentsSHARPS COMPLIANCE CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2019, 2018 and 2017During the years ended June 30, 2019, 2018 and 2017 amortization expense was $0.6 million, $0.6 million and $0.6 million, respectively.As of June 30, 2019, future amortization of intangible assets is as follows (in thousands):Year Ending June 30, 20206122021636202261120235512024140Thereafter646 $3,196NOTE 11 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)The following tables show quarterly financial information for the years ended June 30, 2019 and 2018. 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 30,2018 December 31,2018 March 31,2019 June 30, 2019Total revenues$10,293 $12,394 $9,451 $12,174Gross profit$3,352 $3,991 $2,035 $3,892Operating income (loss)$125 $827 $(1,073) $568Net income (loss)$70 $779 $(1,125) $490Net income (loss) per share - basic and diluted$0.00 $0.05 $(0.07) $0.03Weighted average shares - diluted16,089 16,106 16,138 16,150 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 16,082F-21Exhibit 3.3CERTIFICATE OF AMENDMENTTO THEAMENDED AND RESTATED CERTIFICATE OF INCORPORATIONOFSHARPS COMPLIANCE CORP.(Pursuant to Section 242 of theGeneral Corporation Law of the State of Delaware)Sharps Compliance Corp., a Delaware corporation (the “Corporation”), does hereby certify as follows:1. This Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Corporation has been dulyadopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 2. This Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Corporation amendsSection A of Article 4 of the Amended and Restated Certificate of Incorporation, as heretofore amended, supplemented, and restated,by deleting Section A of Article 4 thereof and substituting in lieu thereof a new paragraph, which shall read in its entirety as follows:4A. General. The corporation shall have authority to issue two classes of stock, and the total number authorized shallbe Forty Million (40,000,000) shares of Common Stock of the par value of one cent ($0.01) each, and one million (1,000,000)shares of Preferred Stock of the par value of one cent ($0.01) each. All shares of the Common Stock shall rank equally and allshares of the Preferred Stock shall rank equally, and be identical in all respects regardless of series, except with respect to thePreferred Stock (i) as to terms which may be specified by the board of directors pursuant to the provisions of Section B of thisArticle 4, and (ii) that shares of any one series issued at different times may differ as to the dates from which dividends thereonshall accrue and be cumulative. A description of the different classes of stock of the corporation and a statement of thedesignations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of eachclass of such stock are as follows:3. This Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Corporation shall beimmediately effective upon filing with Secretary of State of the State of Delaware.[Signature page follows] IN WITNESS WHEREOF, Sharps Compliance Corp. has caused this Certificate of Amendment to be duly executed in itscorporate name this ____ day of November, 2018. SHARPS COMPLIANCE CORP. By: /ss/ Diana P. DiazName: Diana P. DiazTitle: Vice President and Chief Financial Officer 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 YorkExhibit 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 28, 2019, relating to the consolidated financial statements, which appears in this Annual Report on Form 10-K./s/ BDO USA, LLPHouston, TexasAugust 28, 2019Exhibit 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 28, 2019By: /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 28, 2019By: /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 fiscal year ended June 30, 2019, as filed withthe Securities 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 Report fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: August 28, 2019By: /s/ DAVID P. TUSA David P. Tusa Chief Executive Officer and President (Principal Executive Officer)The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosuredocument. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company andfurnished to the Securities and Exchange Commission or its staff upon request.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 fiscal year ended June 30, 2019, as filed withthe Securities and Exchange Commission on the date hereof, I, Diana P. Diaz, Vice President and Chief Financial Officer of the Company, certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:(1)The Report fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: August 28, 2019By: /s/ DIANA P. DIAZ Diana P. Diaz Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosuredocument. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company andfurnished to the Securities and Exchange Commission or its staff upon request.

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