UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to .
Commission File Number: 001-34269
SHARPS COMPLIANCE CORP.
(Exact name of registrant as specified in its charter)
Delaware
74-2657168
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
9220 Kirby Drive, Suite 500, Houston, Texas
77054
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (713) 432-0300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which
Registered
Common Shares, $0.01 Par Value
SMED
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to
submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
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 financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 31, 2020, the aggregate market value of the registrant’s Common Stock held by non-affiliates was approximately $145 million
(based on the closing price of $9.45 on December 31, 2020 as reported by The NASDAQ Capital Market). For purposes of this computation only,
all executive officers, directors and 10% beneficial owners of the registrant 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 17,243,388 as of August 23, 2021.
DOCUMENTS INCORPORATED BY REFERENCE:
(1)
Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A for the Annual Meeting of Shareholders to be held on November 19, 2020 are incorporated by reference
into Part III. Such Proxy Statement will be filed within 120 days after the end of the registrant's fiscal year.
2
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
PART I
Item 1
Business
4
Item 1A
Risk Factors
15
Item 1B
Unresolved Staff Comments
23
Item 2
Properties
23
Item 3
Legal Proceedings
23
Item 4
Mine Safety Disclosures
23
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
23
Item 6
Selected Financial Data
24
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 8
Financial Statements and Supplementary Data
34
Item 9
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
34
Item 9A
Controls and Procedures
34
Item 9B
Other Information
35
PART III
Item 10
Directors, Executive Officers and Corporate Governance
35
Item 11
Executive Compensation
36
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
36
Item 13
Certain Relationships and Related Transactions and Director Independence
36
Item 14
Principal Accountant Fees and Services
36
PART IV
Item 15
Exhibits and Financial Statement Schedules
37
Item 16
Form 10-K Summary
39
Signatures
40
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3
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements and information relating to the Company (as
defined below) and its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by
and information currently available to the Company’s management. When used in this report, the words “may,”, "could",
“position,” “plan,” “potential,” “continue,” “anticipate,” “believe,” “expect,” “estimate,” “project” and “intend” and
words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to
identify forward-looking statements. Such statements reflect known and unknown risks, uncertainties and assumptions related
to 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 in industry practices, onetime events and other factors described herein
including the impact of the coronavirus COVID-19 (“COVID-19”) pandemic on our operations and financial results. Based
upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed,
estimated, expected or intended. 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 vary materially. You are cautioned not to place undue reliance on any forward-looking
statements. You should also understand that it is not possible to predict or identify all such factors and as such should 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 I
ITEM 1. BUSINESS
Sharps Compliance Corp. was formed in November 1992 as a Delaware corporation. The information presented herein is for
Sharps Compliance Corp. and its wholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.),
Sharps e-Tools.com Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc., Sharps Environmental Services, Inc. (dba Sharps
Environmental Services of Texas, Inc.), Sharps Safety, Inc., Alpha Bio/Med Services LLC, Bio-Team Mobile LLC, Citiwaste,
LLC and Sharps Properties, 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 as reasonably practicable after the reports are filed with the SEC. The filings are also available via
the SEC’s website at www.sec.gov. The information contained on, or that can be accessed through, our website is not a part of
this Annual Report on Form 10-K.
COMPANY OVERVIEW
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 regulated waste from customers in multiple healthcare-related markets. The markets
we manage are small to medium-size healthcare waste generators including professional offices (ambulatory surgical centers,
physician groups, dentists and veterinarians), long-term care facilities, government agencies, home health care, retail clinics and
immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in the home setting
such as sharps, lancets and ultimate-user medications which generates business relationships with pharmaceutical
manufacturers and other markets 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, pharmaceutical and hazardous waste. Our differentiated approach provides our customers the flexibility to
transport waste via direct route-based services, the United States Postal Service (“USPS”) or common carrier depending 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 that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal
and compliance requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and
continued recurring revenue growth.
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Our flagship products are the Sharps Recovery System™ and MedSafe® Medication Disposal System. These two product
offerings account for over 50% of company 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 Responsible
Drug Disposal Act of 2010 (the “Act”), MedSafe is a superior solution used in both private and public sectors to properly
remove medications from communities and aid in the prevention of drug misuse.
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 80%
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 and prospects directly. Our route-based services,
matched with comprehensive mailback solutions, offer us a key differentiator in the market and the ability to capitalize on
larger or regional contracts within the healthcare market. With the growth in infrastructure to support the route-based service,
we have strategically 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 medication disposal solutions for controlled substances, a system for DEA-inventory controlled medication
disposal for professionals, the Black Pail Program for disposal of most unused pharmaceuticals, including Resource
Conservation and Recovery Act ("RCRA") hazardous medications, and the Inhaler Disposal system. We have also developed
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 hazardous drug spills.
As hospitals and surgery centers increase their sustainability efforts, they are looking for ways to recycle more materials, such
as SUDs. SUDs are constructed of materials capable of being recycled, primarily plastics and metals. With a greater emphasis
on more sustainable solutions, the TakeAway Recycle System is a much-needed complement to the single-use device market.
Our dually permitted trucks allow our hazardous waste direct pickup service to align with our medical waste so that we can
fully service all our customers. Most healthcare professionals have hazardous waste in addition to medical waste. By also
transporting hazardous waste, we have a competitive advantage over local haulers while still offering cost-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. We currently have 190 full-time employees and two part-time employees. We have manufacturing,
assembly, distribution and warehousing operations located in Houston, Texas.
We own and operate fully-permitted treatment facilities in Carthage, Texas and Nesquehoning, Pennsylvania that incorporate
our processing and treatment operations. These facilities are currently permitted to treat and process 182 tons of medical,
pharmaceutical and other healthcare-related waste per day. The Carthage facility offers steam sterilization in an autoclave and
high-heat incineration to properly treat 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
for managing our recycling solution. In August 2020, the Company added a second autoclave to the Texas facility. The
Nesquehoning facility has been permitted as both a medical waste treatment facility, using a autoclave, and as a transfer station
for medical, pharmaceutical and trace chemotherapy waste. The Company added a second autoclave to the Pennsylvania facility
in October 2020.
Impact Relating to COVID-19 and the Company’s Continuation of Its Infrastructure Build Out
We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including how it will
impact our customers, employees, suppliers, vendors, business partners and distribution channels. While we did not incur
significant disruptions during the year ended June 30, 2021 from COVID-19, we are unable to predict the impact that
COVID-19 will have on our financial position and operating results due to numerous uncertainties. These uncertainties include
the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations
on our operations or mandates to provide products or services), impacts on our supply chain, the effect on customer demand or
changes to our operations. The health of our workforce and our ability to meet staffing needs in our route-based, treatment and
distribution operations and other critical functions cannot be predicted and is vital to our operations.
The Company has taken precautions to ensure the safety of its employees including remote working options for certain
corporate office employees, while at the same time remaining active as a leading national provider of comprehensive medical
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5
waste solutions, bringing uninterrupted essential support to its customers and the healthcare industry. For example, the
Company increased its route-based drivers, plant and operations personnel by ten percent (10%) in advance of the COVID-19
pandemic to make sure that its operations and servicing of customers would not be adversely affected by the potential absence
of employees due to COVID-19. The Company also temporarily increased the pay for its front-line operations personnel and
drivers during the pandemic.
Related to customer demand, the Company saw temporary closures of about 1,000 dental, dermatology and physician practices
equating to about $0.1 million in lost monthly revenue for the Company from mid-March 2020 through June 2020. Offsetting
this through most of fiscal year ended June 30, 2021 has been increased volumes of medical waste generated by many of the
Company’s long-term care customers who are utilizing the Company’s systems and services to contain and dispose of personal
protective equipment (“PPE”) used in their facilities.
The Company is continuing to focus on expanding its infrastructure programs, which began in calendar 2019, to support what it
anticipated would be a strong 2021 flu and immunization season as well as medical waste disposal related to the COVID-19
vaccine which became available for administration in the U.S. at the end of calendar year 2020. Additionally, the Company saw
some increased medical waste volumes related to COVID-19 such as the long-term care market where PPE in many facilities
has been disposed of as medical waste and not as trash which has been the historical practice. Finally, the Company’s route-
based footprint now extends to 37 states, or 80% of the population, significantly increasing the pipeline of larger small and
medium quantity generator sales opportunities.
To address these opportunities, the Company has:
•
Significantly increased its production and inventory of medical waste mailback and shipback solutions to ensure it
remains well positioned to meet an expected increase in customer demand related to the 2021 season flu and the
COVID-19 vaccine;
•
Increased its medical waste processing capacity from 10 million to 27 million pounds per year through the addition of
a larger autoclave at its Texas facility as well as an additional autoclave at its Pennsylvania facility;
•
Secured a larger warehouse and distribution facility in Pennsylvania to store and distribute larger volumes of medical
waste mailbacks; and
•
Expanded its route-based truck fleet and drivers necessary to facilitate the potential increase in volumes from its
expanded 37 state route-based footprint and related larger prospect opportunities.
These efforts have contributed to the Company's success in meeting customer needs throughout the pandemic, particularly as
the rollout of COVID vaccines has created increased demand for the Company's services.
The Company applied for and received loan proceeds of $2.2 million under the Paycheck Protection Program (“PPP”) under a
promissory note from its existing commercial bank (the “PPP Loan”). The PPP, established as part of the Coronavirus Aid,
Relief, and Economic Security (“CARES”) Act, is administered by the Small Business Administration ("SBA"). On June 15,
2021, the Company received a notification from its existing commercial bank that the SBA fully approved the Company's PPP
Loan forgiveness request and that the PPP Loan, reflected in the Company’s balance sheet as Long-Term Debt, was forgiven.
The Company recognized the gain on forgiveness of the PPP Loan in the financial statements during the year ended June 30,
2021.
On a broader note, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and
volatility in, the credit and financial markets, consumer spending and other unanticipated consequences remain unknown. In
addition, we cannot predict the impact that COVID-19 will have on our customers, vendors, suppliers and other business
partners. However, any material adverse effect on these parties could adversely impact our results of operations, cash flows and
financial conditions. External effects from the COVID-19 pandemic began at the end of the third quarter of 2020 and did not
have a material adverse impact on the year ended June 30, 2021 results. The situation surrounding COVID-19 remains fluid,
and we are actively managing our response in collaboration with customers, employees and business partners and assessing
potential impacts to our financial position and operating results, as well as adverse developments in our business. For further
information regarding the impact of COVID-19 on the Company, please see item Part I, Item 1A, Risk factors in this report.
SOLUTIONS OVERVIEW
We offer a broad line of product and service solutions to manage the medical waste and unused dispensed medications
generated by our customers. Our primary solutions include the following:
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6
Sharps 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 Recovery System includes a securely sealed, leak and puncture resistant sharps container
in several sizes ranging from one quart to twenty gallons; USPS-approved shipping box with prepaid priority mail postage;
absorbent material inside the container that can safely hold up to 150 milliliters of fluids; a bag for additional containment and
complete documentation and tracking manifest. The Sharps Recovery System is transported to our owned or contracted
facilities for treatment. Upon treatment or conversion of the waste, we provide electronic proof of receipt and treatment
documentation to the customer through our proprietary SharpsTracer® system.
TakeAway Recovery System: innovative system designed for simplified and environmentally friendly treatment of used
needles, syringes, and other used healthcare products. The TakeAway Recovery System includes a sharps container in sizes
ranging from one quart to thirty gallons; a prepaid-UPS return shipping box, absorbent material inside the container that can
safely hold up to 150 milliliters of fluids; a bag for additional containment and complete documentation and tracking manifest.
The TakeAway Recovery System is transported to our owned or contracted facilities for treatment. Upon treatment or
conversion of the waste, we provide electronic proof of receipt and treatment documentation to the customer through our
proprietary SharsTracer® system.
Route-Based Pickup Service: as a full-service waste management services company, we offer route-based medical and
hazardous waste pickup services with our dually permitted trucks. We service customers and prospects with facilities or
branches that generate larger quantities of medical, pharmaceutical (non-controlled) and limited quantities of hazardous waste
or where the route-based pickup service is preferred. This blended service of mailback and pickup provides cost-savings
benefits by customizing 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, including controlled substances. MedSafe has been designed to meet or exceed the regulations issued
by the DEA implementing the Act, which became effective October 9, 2014. MedSafe is designed for retail pharmacies, long-
term care facilities, hospitals/clinics with on-site pharmacies, narcotic treatment facilities and licensed law enforcement.
TakeAway Medication Recovery System™ : a comprehensive solution designed to meet or exceed the regulations issued by the
DEA implementing the Act, which became effective October 9, 2014. The solution facilitates the proper disposal of unused
medications (including controlled substances) from ultimate users, 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 DEA registrants’ expired or unused controlled substances. The system includes prepaid return
transportation, materials to package for return, complete documentation 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 controlled substances. This 5-gallon pail includes the delivery, containment, pickup and proper disposal of unused
inventory medications for one all-inclusive price.
Inhaler Disposal: an all-in-one solution for effectively collecting, transporting and destroying used pharmaceutical inhalers.
Long-term care facilities can dispose of all medication (controlled and non-controlled substances, harzardous waste
pharmaceuticals and inhalers) with our MedSafe collection receptacle combined with our Inhaler Disposal system.
Hazardous Drug Spill Control Kit™: in response to the United States Pharmacopeia ("USP") publishing General Chapter
<800> ("USP <800>") which sets standards for handling hazardous drugs ("HD") in healthcare settings effective December
2019, the Company launched this USP <800> compliant spill kit for the 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 for shipping 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 instead of recycled.
ComplianceTRACSM: a more advanced web-based version of the Company’s compliance and training program.
ComplianceTRAC is designed to improve worker safety while satisfying applicable Occupational Safety and Health
Administration (“OSHA”) and other requirements for the end-user. The program includes employee training for bloodborne
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7
pathogens, compliance with the Health Insurance Portability and Accountability Act of 1996 and the Hazardous
Communication 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 platform available 24/7.
Universal Waste Shipback Systems: a jointly-promoted program with Veolia Environmental Services using their
RECYCLEPAK solutions for the collection, transportation and recycling of light bulbs, batteries and other mercury-containing
devices. The solutions are marketed to existing and prospective customers as a complement to the Company’s line of medical
waste and unused medication management solutions.
Other Solutions: a wide variety of other solutions including TakeAway Environmental Return System™, SharpsTracer ®,
Sharps Secure ® Needle Disposal System, Complete Needle™ Collection & Disposal System, Pitch-It IV™ Poles, Asset Return
System, Sharps ® Medical Waste Management System (“MWMS”), Lead Apron Recycling System and Spill Kit Recovery
System.
MARKET OVERVIEW
The Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare
facilities, pharmaceutical manufacturers, home healthcare providers, long-term care, retail pharmacies and clinics and the
professional market comprised of physicians, dentists, surgery centers and veterinary practices. These markets require cost-
effective services for managing medical, pharmaceutical and hazardous 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, labs, dialysis centers and other healthcare facilities. This regulated market consists of
small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower
cost to service with solutions to match individual facility needs. The Company has made ongoing investments in sales
and marketing initiatives to drive growth. Our sales team focuses on larger-dollar and nationwide opportunities where
we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical
waste management offering. Through targeted telemarketing initiatives, e-commerce driven website and web-based
promotional activities, we believe we can drive significant additional growth as we increase awareness of the
Company's innovative solution offerings with a focus on the individual or small group professional offices,
government agencies, smaller retail pharmacies and clinics and long term care facilities. The Company is able to
compete more aggressively in the medium quantity generator market with the addition of route-based services where
the mailback may not be as cost-effective. The Company’s route-based business provides direct service to areas
encompassing over 80% of the U.S. population.
•
From July 2015 to July 2016, the Company acquired three route-based pickup service companies, which strengthened
the Company's position in the Northeast. Through a combination of acquisition and organic growth, the Company
now offers route-based pickup services in a thirty-seven (37) state region of the South, Southeast, Southwest,
Midwest and Northeast portions of the United States. To facilitate operational efficiencies, the Company has opened
transfer stations and offices in strategic locations. The Company directly serves more than 16,200 customer locations
with route-based pickup services. With the addition of these route-based pickup regions and the network of medical
and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product
portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of
waste. The network has had a significant positive impact on our pipeline of sales opportunities over 60% of this
pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the
mailback and pickup service are integrated into the offering.
•
The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2019 Population
Estimates and National Projections, the nation's 65-and-older population has grown rapidly since 2010 (34.2% over
the past decade), 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, the Company delivers value as a single-source provider with blended mailback and route-based pickup
services matched to the waste volumes of each facility.
•
The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses
on driving increased promotion of the Sharps Recovery System. According to the Centers for Disease Control
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("CDC"), 44.9% of U.S. adults received a flu shot and 32.2% of flu shots for adults were administered in a retail
clinic in 2018. Over the flu seasons from 2011 to 2020, the Company saw a growth in the retail flu shot related orders
in seven years of 10% to 36%, including a 25% increase in 2020, and declines in three years of 13% to 17%. Despite
the volatility, Sharps believes the retail market should continue to contribute to long-term growth for the Company as
consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.
•
The passage of regulations for ultimate-user medication disposal allows the Company to offer new solutions
(MedSafe and TakeAway Medication Recovery 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 long-term care 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 Sharps Recovery 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 government agencies in need of proper and
regulatory compliant medication disposal. The federal government, state agencies and non-profits recognize the need
to fund programs that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for
proper medication disposal 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 Sharps Recovery System, continues to offer the best option for proper sharps disposal at an
affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-
dollar, self-injectable medications including 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 and unused medication disposal solutions. The Company offers a variety of services to meet these needs,
including the Sharps Secure Needle Disposal System, 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 Medication Recovery System), mailback services for DEA registrant expired inventory of controlled
substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback
services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities
(TakeAway Recycle System).
•
COVID-19 prompted healthcare demands and opportunities including the expected significant increase in seasonal flu
immunizations, facilitating the proper collection, transportation and treatment of syringes utilized in the
administration of the COVID-19 vaccine, or supporting the pick-up and processing of the significantly increased
volumes of healthcare waste from the long-term care industry.
•
The Company's financial position with a cash balance of $27.8 million (used for working capital needs), debt of
$4.1 million and additional availability under the Credit and Loan Agreements as of June 30, 2021 (used to support
working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant
compliance).
COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
Leading national healthcare waste management provider specializing in regulated waste streams, including medical,
pharmaceutical, and hazardous waste
Sharps Compliance Corp. is a leading national healthcare waste management provider specializing in regulated waste streams
including medical, pharmaceutical and hazardous waste. Our services facilitate the safe and proper collection, transportation
and environmentally-responsible treatment of regulated waste from customers in multiple healthcare-related markets. The
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markets we manage are small to medium-size generators of healthcare waste including professional offices (ambulatory surgical
centers, physician groups, dentists and veterinarians), long-term care facilities, government agencies, home health care, retail
clinics and immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in the home
setting such as sharps, lancets and ultimate-user medications which generates business relationships with pharmaceutical
manufacturers and other markets 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, pharmaceutical and hazardous waste. Our differentiated approach provides our customers the flexibility to
transport waste via direct route-based services, USPS or common carrier depending on the 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
that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance
requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and continued
recurring revenue growth. Over the past few years, the primary focus of our marketing efforts has been on educating the
marketplace about us as an alternative to the historical provider of waste services.
Vertically-integrated full-service operations
Our operations are fully integrated, including manufacturing, assembly, distribution, treatment, online tracking and customer
reporting. We have manufacturing, assembly, distribution and warehousing operations located in Houston, Texas. We own and
operate fully-permitted treatment facilities in Carthage, Texas and Nesquehoning, Pennsylvania that incorporate our processing
and treatment operations.
The Carthage facility offers steam sterilization in an autoclave and high-heat incineration to properly treat regulated medical
waste and non-hazardous pharmaceuticals. The autoclave system is utilized alongside the incinerator for day-to-day operations.
We believe that our Texas facility is one of only ten permitted commercial facilities in the United States capable of treating all
types of medical waste and pharmaceuticals (i.e., both incineration and autoclave capabilities). The Carthage location also
serves as the Company's main facility for managing our recycling solution. The Nesquehoning facility has been permitted as
both a medical waste treatment facility, using an autoclave, and as a transfer station for medical, pharmaceutical and trace
chemotherapy waste of up to 82 tons per day. The Company added a second autoclave to the Pennsylvania facilities in October
2020.
We track the movement of each shipment from outbound shipping to ultimate treatment and provide confirmation to the
customer for their records using our proprietary SharpsTracer tracking and documentation system. We also track treatment
volumes associated with pickup services provided as part of our blended product portfolio using SharpsTracer. We also provide
customized reporting and comprehensive regulatory support for many of our customers. By controlling all aspects of the
process internally, the Company is able to provide a one-stop solution and simplify the tracking and record-keeping processes
to meet regulatory requirements for our customers. We believe the fully-integrated nature of our operations is a key factor and
differentiator 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. We believe our facilities
can accommodate significant additional volume, incurring only variable costs of transportation and processing. Once we gain a
new customer, our profitability typically increases as our customer base grows with minimal additional overhead expense due
to the embedded nature of our products and the ease with which we can accommodate extra volume.
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 include professional offices (ambulatory surgical centers, physician groups, dentists and veterinarians), long-
term care facilities, government agencies, home healthcare, retail clinics and immunizing pharmacies. Additionally, our
mailback solutions are positioned to manage waste generated in the home setting such as sharps, lancets and ultimate-user
medications which generates business relationships with pharmaceutical manufacturers and other markets to provide safe and
proper disposal.
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Our billings by market for the years ended June 30, 2021, 2020 and 2019 are below (as expressed in percentages of revenues):
Year Ended June 30,
2021
2020
2019
BILLINGS BY MARKET*:
Retail
50 %
30 %
26 %
Professional
22 %
29 %
34 %
Home Health Care
13 %
19 %
17 %
Pharmaceutical Manufacturer
6 %
9 %
9 %
Long-Term Care
5 %
6 %
6 %
Government
3 %
4 %
5 %
Environmental
1 %
1 %
1 %
Other
— %
2 %
2 %
100 %
100 %
100 %
*Customer billings does not include adjustments to arrive at reported generally accepted accounting principles ("GAAP")
revenue and therefore is a non-GAAP measure. Customer billings include all invoiced amounts associated with products
shipped or services rendered during the period reported. GAAP revenue includes customer billings as well as numerous
adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition of certain revenue
associated with product returned for treatment and destruction and (iii) provisions for certain product returns and discounts to
customers which are accounted for as reductions in sales in the same period the related sales are recorded. See Note 2
“Summary of Significant Accounting Policies” in “Notes to Consolidated Financial Statements”. The Company believes this
information about customer billings important in order for investors to be able to compare the performance of the business
period over period.
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 used sharps into household trash. Numerous cities, such as Seattle, have passed ordinances making
disposal of sharps in the trash illegal. Almost all other states and the District of Columbia and territories have passed strict
guidelines regarding home sharps disposal. Whether legislation or strict guidelines, most of the U.S. population is required to
first properly contain their home generated sharps before placing them into the household trash. In addition, certain states and
counties have passed ordinances requiring businesses such as hospitals and those that sell syringes to the public, such as retail
pharmacies and veterinary clinics, to take back syringes, once used, in regulatory-compliant sharps containers at no charge to
the consumer.
In order to reduce accidental poisonings and pollution of our water and municipal water systems, 22 states and the District of
Columbia have introduced legislation over the last few years intended to manage the disposal of unused consumer medications.
Seven states and the District of Columbia have successfully passed such legislation. Passed or pending legislation related to the
disposal of consumer medications covers about two-thirds of the U.S. population. Further, since 2009, nine states and several
counties have introduced legislation requiring manufacturer responsibility for consumer-generated unused medications and in
some cases home sharps disposal.
Both Federal and state regulatory agencies are addressing this issue by banning the sewering of medications by medical
facilities and strongly encouraging the public not to sewer their unwanted drugs. States like California, Washington and
Minnesota have required assessment and proper treatment by a medical waste disposal company for years. In 2010, Congress
passed the Secure and Responsible Drug Disposal Act, leading to DEA changes to the Controlled Substances Act in 2014,
allowing certain DEA registrants to collect controlled substances from the public. Collection receptacles can now be found in
retail pharmacies, long-term care facilities and hospitals throughout the country.
The Environmental Protection Agency (“EPA”) has recently passed regulations that will affect the healthcare industry including
the Generator Improvement Rule 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 generated on their sites through less rigorous and more
streamlined regulatory requirements. The Pharmaceutical Rule also instituted a national ban on the sewering of any hazardous
waste pharmaceuticals generated by healthcare facilities as of August 19, 2019.
As state adoption of these federal regulations occurs over the next 24 months and enforcement of these statutes increases, more
companies could turn to solutions such as ours to help manage their hazardous waste pharmaceuticals, especially in long-term
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care, providing the needed regulatory compliance. We believe we are well-positioned to benefit given our strict adherence to
established standards and extensive documentation and records.
Environmentally-conscious solution provider.
In addition to providing cost-effective solutions for our customers, the Company is committed to discovering new sustainable
initiatives that mitigate the effects of potentially hazardous waste on the environment. Our patented Waste Conversion Process™
repurposes regulated medical waste and unused medications into new resources used in industrial applications, such as the
generation of electricity or recycled plastics used in the industrial sector.
Our TakeAway 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 for shipping 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 be recycled.
Our Universal Waste Shipback Program recycles the materials in light bulbs, batteries and other mercury-containing devices for
use in new applications. In addition, the use of recycled paper and plastic materials for many of our products further
demonstrates our total commitment to environmentally sound business practices. As an organization, the Company is a leading
proponent for developing solutions for the safe disposal of sharps, unused medications (including controlled substances), light
bulbs, batteries and other mercury-containing devices in the community and continually works to raise public awareness of the
issue.
Experienced and accomplished management team.
Our senior management team has extensive industry experience and is committed to the continued growth and success of our
company. Mr. David P. Tusa, CEO and President, in addition to his ten-plus years with the Company has over 20 years of
business and public company experience in multiple industries and in companies with revenues up to $500 million. Ms. Diana
P. Diaz, CPA, MBA, Executive 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 information
technology and operations-related experience. Mr. Dennis Halligan, Vice President of Sales and Marketing, has broad
marketing experience with the Company and at a variety of firms, including Stir Creative and R.J. Reynolds.
GROWTH STRATEGIES
We 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 for Registrants) and shipback services for the collection and recycling
of single-use devices (TakeAway Recycle System). These innovative products and services allow us to gain further sales from
existing customers and gain new customers who need more comprehensive products. We will continue our efforts to develop
new solution offerings designed to facilitate the proper and cost-effective management of medical waste, pharmaceutical waste,
hazardous waste and ultimate-user medication disposals to better serve our customers and the environment. Additionally, we
will continue to seek out and identify prospective new customers and markets for new solutions designed to meet the needs of
these new customer segments.
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-selling opportunity for the Company. While we offer hazardous waste services nationwide, the ability to directly
service increases operational efficiencies and provides a better-priced solution for the customer. In addition to hazardous waste
services, the Company has multiple pharmaceutical waste solutions for cross-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.
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A new market for the Company is the recycling of single-use devices. The interest from healthcare institutions in safer and
more sustainable offerings has generated 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 a recycling 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 marketing
differentiator.
Many of our customers who currently use the Sharps Recovery System and TakeAway Recovery System could also benefit
from the TakeAway Medication Recovery System, MedSafe, our hazardous waste solutions, our universal waste solutions or
other specialized products. Although currently focused primarily on the proper management of medical and pharmaceutical
wastes generated by medical professionals, pharmacies (including chains and mail order), long-term care facilities and other
related organizations will develop needs for our other product lines as they expand their patient service offerings. As an
entrenched and value-added supplier of treatment solutions, we believe the Company can capture incremental business from our
existing customers.
The Company’s Pharmaceutical Manufacturer billings have grown from $0.3 million to $5.2 million for the years ended June
30, 2011 and 2021, respectively. We continue to see increased interest in our patient support program solution among
pharmaceutical manufacturers related to self-injectable medications especially related to new drug launches. We believe
manufacturers are now, more than ever, focused on (i) product differentiation, (ii) improved interaction with patients and (iii)
creating a touch point for individual patient follow-up that could lead to improved therapy outcomes.
The patient support programs include the direct fulfillment of the Sharps Recovery System to the pharmaceutical
manufacturers’ program participants, which provides the proper containment, return and treatment of the needles or injection
devices utilized in therapy. Sharps’ proprietary SharpsTracer system tracks the return of the Sharps Recovery System by the
patient to the treatment facility and then makes the electronic data available to the pharmaceutical manufacturer. This data
assists them in monitoring medication discipline and provides them with a touch point for individual patient follow-up,
potentially leading to better outcomes. We believe the Company is a leader in providing solutions of this type to this market.
We are optimistic 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 flu shots for adults were administered in a retail clinic in 2018. Over the flu seasons from
2011 to 2020, the Company saw a growth in the retail flu shot related orders in seven years of 10% to 36%, including a 25%
increase in 2020, and declines in three years of 13% to 17%. COVID-19 prompted healthcare demands and opportunities
including the expected significant increase in seasonal flu immunizations, facilitating the proper collection, transportation and
treatment of syringes utilized in the administration of the COVID-19 vaccine. Despite the volatility, Sharps believes the retail
market should continue to contribute to the Company's long-term growth as consumers increasingly use alternative sites, such
as retail pharmacies, to obtain immunizations.
Active acquisition program
From July 2015 to July 2016, the Company acquired three route-based pickup service companies, which strengthened the
Company's position in the Northeast. Through a combination of acquisition and organic growth, the Company now offers route-
based pickup services in a thirty-seven (37) state region of the South, Southeast, Southwest, Midwest and Northeast portions of
the United States. To facilitate operational efficiencies, the Company has opened offices and transfer stations in strategic
locations. The Company directly serves more than 16,200 customer locations with route-based pickup services offered to areas
encompassing over 80% 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., the Company offers clients a blended product portfolio to effectively target current and prospective
customers with multi-site and multi-sized locations including those generating 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 the Company in obtaining
larger opportunities whereby the customer has both larger and smaller facilities generating medical waste, used healthcare
materials and 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, long-term care facilities, home healthcare, government, pharmaceutical manufacturers and other commercial
organizations on the benefits of our solutions and the need for safe, cost-effective and environmentally-friendly methods of
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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 of the services
we provide. We believe future growth will be driven by the need for our customers to properly document and track the waste
disposal to maintain compliance with new and existing legislation. We believe our understanding of the legislative process and
focus on accurate and thorough electronic tracking of waste disposal or treatment will provide substantial benefits to new
customers looking to comply with new standards and promote environmentally cleaner business practices.
Enhance sales and marketing efforts.
Over the past five years, the Company has made ongoing investments in sales and marketing initiatives to drive growth.
Through targeted telemarketing initiatives, e-commerce driven website and web-based promotional activities, we believe we
can drive significant additional growth as we increase awareness of the Company’s innovative solution offerings with a focus
on individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and long-term
care facilities. Our sales team also focuses on higher dollar and nationwide opportunities in most of the markets served. The
sales team is able to address larger opportunities where we can integrate the route-based pickup service along with our mailback
solutions to create a comprehensive waste management offering. We have seen success with this approach over the past few
years and believe the comprehensive offering capabilities will continue to accelerate the Company's revenue growth.
CONCENTRATION OF CREDIT AND SUPPLIERS
There is an inherent concentration of credit risk associated with accounts receivable arising from sales to our major customers.
For the fiscal year ended June 30, 2021, two customers represented approximately 45% of revenues and 36%, or $3.5 million of
the total accounts receivable balance at June 30, 2021. For the fiscal year ended June 30, 2020, two customers represented
approximately 35% of revenue and 44%, or $5.2 million, of the total accounts receivable balance at June 30, 2020. For the
fiscal year ended June 30, 2019, two customers represented approximately 27% of revenue. We may be adversely affected by
our dependence on a limited number of high volume customers. Management believes that the risks are mitigated by (i) the
contractual relationships with key customers, (ii) the high quality and reputation of the Company and its solution offerings and
(iii) the continued diversification of our solution offerings into additional markets outside of our traditional customer base.
The Company currently transports (from the patient or user to the Company’s facilities or subcontracted treatment facilities)
many of its mailback and unused medication solution offerings using USPS. Therefore, any long-term interruption in USPS
delivery services would disrupt our business's return transportation and treatment element. Postal delivery interruptions are rare.
Additionally, since USPS employees are federal employees, such employees may be prohibited from engaging in or continuing
a postal work stoppage. However, there can be no assurance that such work stoppage can be avoided. We also have an
arrangement with UPS whereby UPS transports certain other mailback and unused medication solution offerings. Whether
through the USPS or UPS, the ability to ship items is regulated by the government and related agencies. Any change in
regulation restricting the shipping of medical waste, used healthcare materials or unused or expired dispensed pharmaceuticals
through these channels would be detrimental to our ability to conduct operations.
We maintain relationships with multiple raw materials suppliers and vendors in order to meet customer demands and assure
availability of our products and solutions. For the mailback and unused medication solutions, we own proprietary molds and
dies and utilize several contract manufacturers for the production of the primary raw materials. We believe that alternative
suitable contract manufacturers are readily available to meet the production specifications of our products and solutions. We
utilize national suppliers for most of the raw materials used in our other products and solutions and international suppliers for
Pitch-It IV Poles.
INTELLECTUAL PROPERTY
We have a portfolio of trademarks and patents, both granted and pending. We consider our trademarks important in marketing
our products and services, including the Sharps logo, Sharps Recovery System, TakeAway Medication Recovery System,
MedSafe, SharpsTracer, Sharps Secure, TakeAway Environmental Return System, Complete Needle and PELLA-DRX™
among others. For our registered marks, we continue using such marks and will file all necessary documentation to maintain
their registrations for the foreseeable future.
We have a number of trademarks and patents issued over the period from June 1998 to December 2018, including those
applicable to some of the unique design features of our MedSafe solution (number US 10,150,613), our PELLA-DRX waste
conversion process (numbers US 8,163,045, US 8,100,989, US 8,268,073 and US 4,440,534), our Sharps Secure Needle
Disposal System (numbers US 8,162,139 and US 8,235,883), our unique design features related to the TakeAway
Environmental Return System drop-off boxes (number US 8,324,443) and our Complete Needle Collection & Disposal System
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(number US 4,463,106). We have patents pending on our MWMS rapid deployment system and additional features of our
MedSafe solution.
Solely for convenience, the trademarks and service marks referred to in this Annual Report on Form 10-K may appear without
the ® or ™. Still, such references are 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.
COMPETITION
Several competitors who offer similar or identical products and services that facilitate the disposal of smaller quantities of
medical waste. There are also many companies that focus specifically on the marketing of products and services that facilitate
disposal through transport by the USPS (similar to the Company’s products). These companies include (i) smaller private
companies or (ii) divisions of larger companies.
Additionally, we compete in specific markets with Stericycle, the largest medical waste company in the country, which focuses
primarily on a pickup service business model. With the addition of the route-based pickup services offered on a direct basis
covering over 80% of the U.S. population throughout the South, Southeast, Southwest, Midwest and Northeast and through a
network of medical and hazardous waste services providers, the Company believes it is well-positioned with its comprehensive
medical waste management offering to compete with Stericycle. As Sharps continues to grow and increase awareness of the
proper disposal of syringes and unused medications (including controlled substances), it could face additional and possibly
significant competition. We believe our comprehensive line of proven solutions, comprehensive medical waste management
services, first mover advantages, excellent industry reputation, significant history of market and customer success, quality
solutions and products, as well as our capabilities as a vertically-integrated producer of products and services provide
significant differentiation in the current competitive market.
GOVERNMENT REGULATION
Sharps is subject to extensive federal, state and local laws, rules and regulations. We are required to obtain permits,
authorizations, approvals, certificates and other types of governmental permission from the EPA, the Department of
Transportation, the U.S. Food and Drug Administration, the State of Texas, the State of Pennsylvania and local governments for
our facilities and operations. Such laws, rules and regulations have been established to promote occupational safety and health
standards and certain standards have been established in connection with the handling, transportation and disposal of certain
types of medical and solid wastes, including transported medical waste. Our estimated annual costs of complying with these
laws, regulations and guidelines, 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 for Sharps to be in
compliance with such changing laws, rules and regulations.
TREATMENT FACILITIES
We own and operate fully-permitted treatment facilities in Carthage, Texas and Nesquehoning, Pennsylvania that incorporate
our processing and treatment operations. These facilities are currently permitted to treat and process 182 tons of medical,
pharmaceutical and other healhcare-related waste per day. The Carthage facility offers steam sterilization in an autoclave and
high-heat incineration to properly treat 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
for managing our recycling solution. In August 2020, the Company added a second autoclave to the Texas facility. The
Nesquehoning facility has been permitted as both a medical waste treatment facility, using an autoclave, and as a transfer
station for medical, pharmaceutical and trace chemotherapy waste. The Company added a second autoclave to the Pennsylvania
facility in October 2020. The autoclave system is not impacted by the EPA amended Clean Air Act (discussed in Risk Factors).
We believe that our Carthage, Texas facility is one of only nine permitted commercial facilities in the United States capable of
treating all types of medical waste, used healthcare materials and unused or expired dispended medications (i.e., both
incineration and autoclave capabilities). Another three waste-to-energy facilities are permitted to accept medical waste.
ITEM 1A. RISK FACTORS
Risks Related to Our Business, Strategy and Market
If the immunization related business of our customers decreases, the revenues generated by our business could decrease.
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Our operating results are dependent on the amount and types of solutions necessary to service our customers’ needs which are
heavily influenced by the total number of patients our customers are serving at any time, especially related to the administration
of immunizations, including flu shots and COVID-19 vaccines. At times of lower patient activity, our customers have a
decreased need for our services on a supplemental or peak needs basis. Our operating results can vary depending on the timing
and severity of the immunization activity as well as other factors affecting the volume of immunizations administered in the
retail setting.
Our quarterly results may fluctuate significantly.
Our operating results have historically varied quarterly and may continue to fluctuate significantly in the future. Factors that
may affect our quarterly operating results, some of which are beyond the control of management, include, but are not limited to,
seasonality; the timing of inventory builds for patient support programs of our pharmaceutical manufacturer customers; the
timing and severity of the flu season and COVID related immunizations; fluctuations in inventory, energy, transportation, labor,
healthcare and other costs; significant acquisitions, dispositions, joint ventures and other strategic initiatives; and many of the
other risk factors discussed herein. Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not
necessarily meaningful and investors 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 our government and commercial customers or attracting new customers, our results of operations
and financial condition would be adversely affected.
We are dependent on a small group of customers. In addition, there is an inherent concentration of credit risk associated with
accounts receivable arising from sales to our major customers. For the fiscal year ended June 30, 2021, two customers
represented approximately 45% of revenues. Two of these customers also represented approximately 36%, or $3.5 million, of
the total accounts receivable balance as of June 30, 2021. To the extent significant customers are delinquent or delayed in
paying, or we are not successful in obtaining consistent and additional business from our existing and new customers, our
results of operations and financial condition would be adversely affected.
Changing market conditions in the healthcare industry, healthcare consolidation and healthcare reform, could adversely
affect our results of operations.
The U.S. healthcare industry is evolving to meet competing demands for increased healthcare coverage of a growing and aging
population and economic pressures to reduce healthcare costs. As a result of these dynamics, hospital networks are
consolidating physician practices into their networks, independent practices are consolidating together, and healthcare providers
are focused on cutting costs within their businesses. These changes may put downward pricing pressure on services that we
provide to our customers which could adversely affect our results of operations.
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 our internal growth. However, there can be no assurance that we will be able to identify and
purchase suitable operations. In addition, the success of any acquisition depends in part on our ability to integrate the acquired
business. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate
amount of management’s attention and our financial and other resources. There can be no assurance that any acquisitions, if
completed, will be successful.
Aggressive pricing by existing competitors and the entrance of new competitors could drive down our profits and slow its
growth.
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Several competitors who offer similar or identical products and services that facilitate the disposal of smaller quantities of
medical waste. There are also a number of companies that focus specifically on the marketing of products and services, which
facilitate disposal through transport by the USPS (similar to the Company’s products). These companies include (i) smaller
private companies or (ii) divisions of larger companies. Additionally, we compete in certain markets with Stericycle, the largest
medical waste company in the country, which focuses primarily on a pickup service business model. As Sharps continues to
grow and increase awareness of the proper disposal of syringes and unused medications, it could face additional and possibly
significant competition. As a result, we could experience increased pricing pressures that could reduce our margins. In addition,
as we expand our business into other markets, the number, type and size of our competitors may expand. Many of these
potential competitors may have greater financial and operational resources, flexibility to reduce prices and other competitive
advantages that could adversely impact our current competitive position.
The lack of customer long-term volume commitments could adversely affect the Company’s profits and future growth.
Although we enter into exclusive contracts with the majority of our enterprise customers, these contracts do not have provisions
for firm long-term volume commitments. In general, customer purchase orders may be canceled and order volume levels can be
changed or delayed with limited or no penalties. Canceled, delayed or reduced purchase orders could significantly affect our
financial performance.
The level of governmental enforcement of environmental and other regulations has an uncertain effect on our business and
could reduce the demand for our services.
We believe that strict enforcement of laws and regulations relating to regulated waste collection and treatment can have a
positive effect on our business, as these laws and regulations may increase the demand for our services. However, the relaxation
of enforcement, government shutdowns, or other changes in governmental regulation of regulated waste could increase the
number of competitors we face or reduce or delay the need for our services.
Risks Related to the Recent COVID-19 Pandemic
The recent COVID-19 pandemic could have an adverse effect on our operations, results of operations, cash flows and
financial condition
We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including how it will
impact our customers, employees, suppliers, vendors, business partners and distribution channels. The COVID-19 pandemic
has created significant volatility, uncertainty and economic disruption, which could adversely affect our business operations and
may materially and adversely affect our results of operations, cash flows and financial position.
For example, related to customer demand, during the period from March 2020 to May 2020, the Company saw temporary
closures of about 1,000 dental, dermatology and physician practices equating to about $0.1 million in lost monthly revenue for
the Company. Offsetting this through most of fiscal year ended June 30, 2021 has been increased volumes of medical waste
generated by many of the Company’s long-term care customers who are utilizing the Company’s systems and services to
contain and dispose of PPE utilized in their facilities.
In addition to volatility in customer demand and buying habits, we may restrict operations if we deem it necessary or if
recommended or mandated by governmental authorities which would have a further adverse impact on us. We have incurred
additional costs to ensure we meet the needs of our customers, including increases in headcount for route-based, treatment and
distribution personnel, pay increases for these front-line employees and working capital costs to increase inventory levels to
meet expected customer demand later in the calendar year.
Further, our management is focused on mitigating COVID-19, which has required and will continue to require, a large
investment of time and resources across our enterprise. An extended period of remote work arrangements could strain our
business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to
manage our business.
If we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate, we could
suffer damage to our reputation, which could adversely affect our business.
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The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments
that we are not able to predict, including: the severity of the virus; the duration of the outbreak; governmental, business and
other actions (which could include limitations on our operations or mandates to provide products or services); the promotion of
social distancing and the adoption of shelter-in-place orders affecting foot traffic in our customers’ facilities; the impacts on our
supply chain; the impact of the pandemic on the U.S. economic activity overall; the extent and duration of the effect on
customer demand and buying patterns including spend on discretionary categories; the effects of additional customer closures
or other changes to our operations; the health of and availability on our workforce and our ability to meet staffing needs in our
route-based, treatment and distribution operations and other critical functions, particularly if members of our work force are
quarantined as a result of exposure; any impairment in value of our tangible or intangible assets which could be recorded as a
result of a weaker economic conditions; and the potential effects on our internal controls including those over financial
reporting as a result of changes in working environments such as shelter-in-place and similar orders that are applicable to our
employees and business partners, among others.
In addition, if the pandemic continues to create disruptions or turmoil in the credit or financial markets, or impacts our credit
ratings, it could adversely affect our ability to access capital on favorable terms and continue to meet our liquidity needs, all of
which are highly uncertain and cannot be predicted. In addition, we cannot predict the impact that COVID-19 will have on our
customers, suppliers, vendors, and other business partners, and each of their financial conditions. However, any material
adverse effect on these parties could adversely impact our business operations, results of operations, cash flow, and financial
position. The impact of COVID-19 may also exacerbate other risks discussed herein, any of which could have a material
adverse effect on our business. This situation is changing rapidly, and additional impacts may arise that we are not aware of
currently.
Risks Related to Our Operations
We may be unable to manage our growth effectively.
We have in the past, and may in the future, experience significant revenue growth. The increase in revenue and execution of
our growth strategies has placed and will continue to place significant demands on our financial, operational and management
resources. In order to continue our growth, we may need, at some point, to add operations, administrative and other personnel
and to make additional investments in the infrastructure and systems. There can be no assurance that we will be able to find and
train qualified personnel, do so on a timely basis or expand our operations and systems to the extent and in the time required.
Increases in transportation costs may adversely affect our business and results of operation.
We maintain a transportation network and a fleet of vehicles. A significant increase in market prices for trucks, fuel or driver
wages could adversely affect our business through higher transportation costs and reduce our operating margins and reported
results of operations.
The inability of the Company to operate its treatment facilities would adversely affect its operations
The Company has two (2) fully-permitted facilities that house our processing and treatment operations. Our processing and
treatment facilities which, are located in Carthage, Texas and Nesquehoning, Pennsylvania, are currently permitted to treat and
process 182 tons of medical, pharmaceutical and other healthcare-related waste per day. The Company owns these processing
and treatment facilities. The failure to maintain the permits for the treatment facilities or unfavorable conditions in the permits
or new regulations could substantially impair our operations and reduce our revenues. Any disruption in the availability of the
disposal or treatment facilities, whether as a result of action taken by governmental authorities, natural disasters or otherwise,
would have an adverse effect on our operations and results of operations.
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 2021, there can be no assurances that
future periods will include similar business. All contracts with, or subcontracts involving, the federal government are
terminable or subject to renegotiation by the applicable governmental agency on 30-day notice at the option of the
governmental agency. If a material contract is terminated or renegotiated in a manner that is materially adverse to us, our
revenues and future operations could be materially adversely affected.
As a government contractor, we are subject to extensive government regulation, and our failure to comply with applicable
regulations could subject us to penalties that may restrict our ability to conduct our business.
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Governmental contracts or subcontracts involving governmental facilities are often subject to specific procurement regulations,
contract provisions and a variety of other requirements relating to the formation, administration, performance and accounting of
these contracts. Many of these contracts include express or implied certifications of compliance with applicable regulations and
contractual provisions. If we fail to comply with any regulations, requirements or statutes, our existing governmental contracts
or subcontracts involving governmental facilities could be terminated, or we could be suspended from government contracting
or subcontracting. If one or more of our governmental contracts or subcontracts are terminated for any reason, or if we are
suspended or barred from government work, we could suffer a significant reduction in expected revenues and profits.
Furthermore, as a result of our governmental contracts or subcontracts involving governmental facilities, claims for civil or
criminal fraud may be brought by the government for violations of these regulations, requirements or statutes.
The possibility of postal work interruptions and restrictions on shipping through the mail would adversely affect the disposal
or treatment element of the Company’s business and have an adverse effect on our operations, results of operations and
financial condition.
We currently transport (from the patient or user to our facilities or subcontracted treatment facilities) the majority of our
solution offerings using USPS. Therefore, any long-term interruption in USPS delivery services would disrupt the return
transportation and treatment element of our business. Additionally, since USPS employees are federal employees, such
employees may be prohibited from engaging in or continuing a postal work stoppage. However, there can be no assurance that
such work stoppage can be avoided. As noted above, we entered into an arrangement with UPS whereby UPS transports certain
other solution offerings. The ability to ship items, whether through the USPS or UPS, is regulated by the government and
related agencies. Any change in regulation restricting the shipping of medical waste, used healthcare materials or unused or
expired dispensed pharmaceuticals through these channels would be detrimental to our ability to conduct operations. Any
disruption in the transportation of products would have an adverse effect on our operations, results of operations and financial
condition.
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 secure storage and transmission of information. The size and complexity of our computer systems make
them potentially vulnerable to breakdown, malicious intrusion and random attack. Likewise, computer networks and the
internet are, by nature, vulnerable to unauthorized access. An accidental or willful security breach 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 sabotage 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 of which have materially impacted our operations or financial results.
Although we maintain a system of information security and controls, a party that is able to circumvent 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 an information security breach, we may be required to expend significant amounts of time and money to
remedy, protect against or mitigate the effect of the breach, 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 information technology, there can be no assurance that our efforts
will prevent breakdowns or breaches in our systems that could adversely affect our business.
Natural disasters or other catastrophic events could negatively affect our business, financial condition, and results of
operations
Natural disasters such as hurricanes, typhoons or earthquakes could negatively affect our operations and financial performance.
Such events could result in physical damage to one or more of our facilities or equipment, the temporary lack of an adequate
work force in a market, and the temporary disruption in transportation services which we rely on to deliver waste to our
facilities. These events could prevent or delay shipments and reduce both volumes and revenue. Weather conditions and other
event driven special projects may also cause variations in our results. We may be required to suspend operations in some of our
locations, which could have a material adverse effect on our business, financial condition, and results of operations.
Risks Related to Legal, Regulatory, and Compliance
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We are subject to the reporting requirements of federal securities laws, and compliance with such requirements can be
expensive and may divert resources from 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 other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-
Oxley Act”) and the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The
costs of preparing and filing annual and quarterly reports, proxy statements and other information with the Securities and
Exchange Commission and furnishing audited reports to stockholders will cause our expenses to be higher than they would
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 the Sarbanes-Oxley Act and the Dodd-Frank Act. We may need to hire additional financial reporting,
internal controls and other finance personnel to develop and implement appropriate internal controls and reporting procedures.
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 operations costs and subject us to additional liability.
We are subject to extensive federal, state and local laws, rules and regulations. We are required to obtain permits,
authorizations, approvals, certificates and other types of governmental permission from the EPA, the Department of
Transportation, the U.S. Food and Drug Administration, the State of Texas, the State of Pennsylvania and local governments
with respect to our facilities and operations. Such laws, rules and regulations have been established to promote occupational
safety and health standards and certain standards have been established in connection with the handling, transportation and
disposal of certain types of medical and solid wastes, including transported medical waste.
We believe that we are currently in compliance in all material respects with all applicable laws and regulations governing our
business, including the permits and authorizations for our incinerator facility. Our estimated annual costs of complying with
these laws, regulations and guidelines, including environmental laws, is currently less than $200,000 per year. In the event
additional laws, rules or regulations are adopted that affect our business, additional expenditures may be required for us to
comply with such changing laws, rules and regulations. Furthermore, any material relaxation of any existing regulatory
requirements governing the transportation and disposal of medical waste could result in reduced demand for our products and
services and could have a material adverse effect on our revenues and financial condition. The scope and duration of existing
and future regulations affecting the medical and solid waste disposal industry cannot be anticipated and are subject to change.
The handling of regulated waste exposes us to the risk of environmental liabilities.
As a company engaged in regulated waste disposal, we face risks of liability for environmental contamination. CERCLA and
similar state laws impose strict liability on current or former owners and operators of facilities that release hazardous substances
into the environment as well as on the businesses that generate those substances and the businesses that transport them to our
facilities. Responsible parties may be liable for substantial investigation and clean-up costs even if they operated their
businesses properly and complied with applicable federal and state laws and regulations. Liability under CERCLA may be joint
and several, which means that if we were found to be a business with responsibility for a particular CERCLA site, we could be
required to pay the entire cost of the investigation and clean-up even if we were not the party responsible for the release of the
hazardous substance and other companies might also be liable.
Tax interpretations and changes in tax regulations and legislation could adversely affect us.
Tax interpretations, regulations and legislation in the various jurisdictions in which we operate are subject to measurement
uncertainty and the interpretations can impact net income, income tax expense or recovery, and deferred income tax assets or
liabilities. Tax rules and regulations, including those relating to foreign jurisdictions, are subject to interpretation and require
judgment by us that may be challenged by the applicable taxation authorities upon audit. In addition, in response to significant
market volatility and disruptions to business operations resulting from the global spread of the COVID-19 pandemic,
legislatures and taxing authorities in various jurisdictions in which we operate may propose changes to their tax rules. These
changes could include modifications that have temporary effect, and more permanent changes. The impact of these potential
new rules on us, our long-term tax planning, and our effective tax rate could be significant. Although we believe our
assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of
any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
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On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (the Tax Act). The Tax Act reduced the U.S. federal statutory tax rate, broadened the corporate tax base through the
elimination or reduction of deductions, exclusions, and credits, limited the ability of U.S. corporations to deduct interest
expense, and transitioned to a territorial tax system which allows for the repatriation of foreign earnings to the U.S. with a
100% federal dividends received deduction prospectively. In addition, the Tax Act required a one-time transitional tax on
foreign cash equivalents and previously unremitted earnings. Several of the provisions enacted as part of the Tax Act require
clarification and guidance from the IRS and Treasury Department. These or other changes in U.S. tax laws could impact our
profits, effective tax rate, and cash flows.
On March 27, 2020, the President signed into law the CARES Act, which is a substantial tax-and-spending package intended to
provide additional economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act provides numerous
tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net
operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain
payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax
depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The
impact of the CARES Act in prospective periods may differ from our estimates due to changes in interpretations and
assumptions, guidance that may be issued, and actions we may take in response to the CARES Act. The CARES Act is highly
detailed, and we will continue to assess the impact that various provisions will have on our business.
Additionally, in further response to the COVID-19 pandemic, on December 27, 2020, the President signed the Consolidated
Appropriations Act, 2021 (CAA 2021), which provides several business tax relief provisions. We will continue to assess the
CAA 2021 with respect to the provisions that have an impact on our business.
Weather and environmental changes related to climate change, requirements of customers and investors for net carbon zero
emissions strategies, and the introduction of regulations restricting emissions of “greenhouse gases” aimed to limit climate
change, could negatively impact our costs to operate.
Climate change has brought with it numerous environmental changes that may pose risk to our operations. Increases in the
frequency of severe storms, droughts, flooding, fire conditions, blackouts due to extreme heat or other weather events
associated with climate change may disrupt our services and increase the cost of our operations. While we have protocols in
place for operating regions frequently impacted by severe weather changes, continued climate change may require additional
protocols, processes, physical equipment, and training to minimize risks to team members, physical property, and operations.
Following the 2015 Paris Agreement, which set the goal of holding global warming below 2˚C and pursuing efforts to limit the
global average temperature rise to 1.5˚C, many of our customers have established goals for their organizations to be carbon
neutral and have extended such goals to their key vendors and business partners. Additionally, many investors and financial
institutions believe that climate change will significantly influence many companies’ long-term prospects and are requesting
climate change disclosures and commitments from their investments. The increased focus on minimizing climate change may
impact our revenues as well as our cost of operations in the future.
Emerging regulatory frameworks are beginning to establish bans on availability of new fossil fuel vehicles or facilities. Our
services rely on a fleet of vehicles including trucks and other facilities that consume fossil fuel. During 2020, the Prime
Minister of the U.K. indicated diesel fuel will not be sold in the U.K. beginning in 2030 and the Governor of California signed
an order to ban sales of new gasoline cars by 2035. The availability of reliable electric vehicles with the appropriate power
station infrastructure requires significant advancement. The implementation of such bans without adequate infrastructure could
impact our costs to maintain our transportation network and facilities.
Risks Related to Our Common Stock
The 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 our common stock are, and may continue to be, relatively small compared to many other publicly traded
securities. Over the past three years, the Company’s common stock has had an average trading volume of approximately
2,396,350 shares traded per month. It may be difficult for investors to sell shares in the public market at any given time at
prevailing prices, and the price of our common stock may, therefore, be volatile.
Financial and Internal Control Risks
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21
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 common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent and detect errors or fraud. If we
cannot provide reliable financial reports 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 affect our financial condition,
results of operation and access to capital. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with any policies and
procedures may deteriorate.
Restrictions in our Credit Agreement could adversely affect our business, financial condition, results of operations and
value of our securities.
The Credit and Loan Agreements, as defined in Note 5 “Notes Payable and Long-Term Debt” in “Notes to Consolidated
Financial Statements,” contain affirmative and negative covenants that, among other things, require the Company to maintain a
maximum cash flow leverage ratio of no more than 3.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15
to 1.00. The Credit and Loan Agreements also contain customary events of default which, if uncured, may terminate the
agreements and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the
amount of our borrowing available under the agreements. These covenants could affect our ability to operate our business and
may limit our ability to have sufficient funding or otherwise to take advantage of potential business opportunities as they arise.
Our ability to comply with the covenants and restrictions contained in the Credit and Loan Agreements may be affected by
events beyond our control, including prevailing economic, financial, and industry conditions. If the market or other economic
conditions deteriorate, our ability to comply with these 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, unless waived, the lenders could elect to terminate
commitments, cease making further loans, require cash collateralization of letters of credit, cause its loans to become 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 repay such debt in full, and the holders of our stock could experience a partial or total loss of their investment.
Risks Related to Human Capital
The handling, transportation and disposal or treatment of regulated waste carries the risk of personal injury to employees
and others.
Our business requires us to handle materials that may be infectious or hazardous to life and property in other ways. Although
our products and procedures are designed to minimize exposure to these materials, the possibility of accidents, leaks, spills and
acts of God always exists. Examples of possible exposure to such materials include truck accidents, damaged or leaking
containers, improper storage of regulated waste by customers, improper placement by customers of materials into the waste
stream that we are not authorized or able to process, such as certain body parts and tissues; or malfunctioning treatment plant
equipment. Human beings, animals or property could be injured, sickened or damaged by exposure to regulated waste. This in
turn could result in lawsuits in which we are found liable for such injuries, and substantial damages could be awarded against
us. While we carry liability insurance intended to cover these contingencies, particular instances may occur that are not insured
against or that are inadequately insured against. An uninsured or underinsured loss could be substantial and could impair our
profitability and reduce our liquidity.
The loss of our senior executives could affect our 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 the Company’s CEO and President, Executive Vice President and CFO, Vice President of
Operations and Vice President of Sales and Marketing. We believe that the continued success of the business is largely
dependent upon the continued employment of the senior management team and have, therefore, (i) entered into individual
employment arrangements with key personnel and (ii) approved the Compensation and Incentive Plan for participation by the
senior management team in order to provide an incentive for their continued employment with us. The unplanned loss or illness
of one or more members of the senior management team and our inability to hire key employees could disrupt and adversely
impact our ability to execute our business plan.
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22
A change or deterioration in our relations with our employees or an increase in labor and employment costs could have a
materially adverse effect on our business, financial condition and results of operations.
Labor and employment is one of our major costs and increases in employment costs could materially affect our cost structure
and our profitability. We compete with other businesses in our markets for qualified employees and the labor supply is
sometimes tight in our markets. A shortage of qualified employees or unionization efforts would require us to incur additional
costs related to wages and benefits, inefficiencies in operations, unanticipated costs in sourcing temporary or third-party labor,
legal fees and interference with customer relationships.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of the date of this report, we do not have any unresolved staff comments.
ITEM 2. PROPERTIES
The Company utilizes approximately 398,021 square feet of space across the U.S. including space for corporate offices in
Houston, Texas. Sharps has manufacturing, assembly, storage, distribution and warehousing operations as well as two (2) fully-
permitted owned facilities that house our processing and treatment operations. Our processing and treatment facilities which,
are located in Carthage, Texas and in Nesquehoning, Pennsylvania, are currently permitted to treat and process 182 tons of
medical, pharmaceutical and other healthcare-related waste per day.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings and litigation in the ordinary course of business. In the
opinion of management, the outcome of such matters is not anticipated to have a material adverse effect on the Company’s
consolidated financial position or consolidated results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information: The Company’s common stock is quoted on the NASDAQ capital market under the symbol “SMED”.
Over the past three years, the Company’s common stock has had an average trading volume of approximately 2,396,350 shares
traded per month. Stockholders: At August 23, 2021, there were 17,243,388, shares of common stock held by approximately
137 holders of record. However, the Company believes the number of beneficial owners exceeds this number. The last reported
sale of the common stock on August 23, 2021 was $8.74 per share.
Dividend Policy: The Company has never declared nor paid any cash dividends on its common stock. The Company currently
intends to retain its cash generated from operations for working capital purposes and to fund the continued expansion of its
business and does not anticipate paying any dividends on our common stock in the foreseeable future. Moreover, future
payment of dividends may be restricted by credit or other agreements to which the Company is a party.
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23
Securities Authorized for Issuance under Equity Compensation Plans:
The following equity compensation plan information is provided as of June 30, 2021:
Number of
securities to
be issued upon
exercise
of outstanding
options,
warrants and
rights
Weighted
average
exercise price
of
outstanding
options,
warrants
and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans
(excluding securities
reflected in column (a))
Plan Category
(a)
(b)
(c)
2010 Stock Plan as approved by shareholders (1)
354,621 $
4.10
956,089
Notes:
(1) Represents stock options issued under the Sharps Compliance Corp. 2010 Stock Plan.
See Note 7 "Stock Based Compensation" in "Notes to Consolidated Financial Statements."
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data has been derived from our audited financial statements and should be read in
conjunction with the historical Consolidated Financial Statements and related notes 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,
2021
2020
2019
2018
2017
Revenues
$
76,424 $
51,146 $
44,312 $
40,141 $
38,188
Operating income (loss)
$
12,302 $
910 $
447 $
(577) $
(1,187)
Net income (loss)
$
12,868 $
2,266 $
214 $
(672) $
(1,293)
Net income (loss) per share:
Basic
$
0.78 $
0.14 $
0.01 $
(0.04) $
(0.08)
Diluted
$
0.76 $
0.14 $
0.01 $
(0.04) $
(0.08)
Total assets
$
75,431 $
54,136 $
36,040 $
33,231 $
34,464
Total debt
$
4,064 $
5,163 $
1,465 $
2,002 $
2,603
Cash
$
27,767 $
5,416 $
4,512 $
5,155 $
4,675
Working capital
$
27,945 $
11,050 $
10,575 $
10,258 $
10,488
Total stockholders’ equity
$
46,584 $
29,578 $
26,126 $
25,174 $
25,287
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and
related notes appearing elsewhere in this Annual Report on Form 10-K. See “Information Regarding Forward Looking
Statements and "Item 1A, Risk Factors.”
RESULTS OF OPERATIONS
The following analyzes changes in the consolidated operating results and financial condition of the Company during the years
ended June 30, 2021, 2020 and 2019, 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):
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24
Year Ended June 30,
2021
%
2020
%
2019
%
Revenues
$
76,424
100.0 % $
51,146
100.0 % $
44,312
100.0 %
Cost of revenues
47,514
62.2 %
35,384
69.2 %
31,042
70.1 %
Gross profit
28,910
37.8 %
15,762
30.8 %
13,270
29.9 %
SG&A expense
15,761
20.6 %
14,046
27.5 %
12,003
27.1 %
Depreciation and amortization
847
1.1 %
806
1.6 %
820
1.9 %
Operating income
12,302
16.1 %
910
1.8 %
447
1.0 %
Other income (expense)
2,036
2.7 %
(226)
(0.4) %
(63)
(0.1) %
Income before income taxes
14,338
18.8 %
684
1.3 %
384
0.9 %
Income tax expense (benefit)
1,470
1.9 %
(1,582)
(3.1) %
170
0.4 %
Net income
$
12,868
16.8 % $
2,266
4.4 % $
214
0.5 %
YEAR ENDED JUNE 30, 2021 AS COMPARED TO YEAR ENDED JUNE 30, 2020
Total revenues for the fiscal year ended June 30, 2021 of $76.4 million increased by $25.3 million, or 49.4%, from the total
revenues for the fiscal year ended June 30, 2020 of $51.1 million. The increase in revenue is mainly due to increased billings in
the Retail, Professional, Long-Term Care and Pharmaceutical Manufacturer markets. The net increase in billings is partially
offset by current year deferred revenue net of product returns on sales in prior periods. Billings by market are as follows (in
thousands):
Year Ended June 30,
2021
2020
Variance
BILLINGS BY MARKET:
Retail
$
40,513 $
16,033 $
24,480
Professional
17,966
15,637
2,329
Home Health Care
10,264
9,938
326
Pharmaceutical Manufacturer
5,224
4,661
563
Long-Term Care
4,159
3,324
835
Government
2,274
2,292
(18)
Environmental
570
247
323
Other
592
876
(284)
Subtotal
81,562
53,008
28,554
GAAP Adjustment *
(5,138)
(1,862)
(3,276)
Revenue Reported
$
76,424 $
51,146 $
25,278
*Represents the net impact of the revenue recognition adjustments 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 revenue includes customer billings as well as numerous adjustments necessary to
reflect, (i) the deferral of a portion of current period sales, (ii) recognition of certain revenue associated with product returned
for treatment and destruction and (iii) provisions for certain product returns and discounts to customers which are accounted
for as reductions in sales in the same period the related sales are recorded. See Note 2 “Summary of Significant Accounting
Policies” in “Notes to Consolidated Financial Statements”.
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25
The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total
billings):
Year Ended June 30,
2021
% Total
2020
% Total
BILLINGS BY SOLUTION:
Mailbacks
$
54,755
67.1 % $
28,440
53.7 %
Route-based pickup services
13,677
16.8 %
10,390
19.6 %
Unused medications
8,159
10.0 %
9,163
17.3 %
Third party treatment services
570
0.7 %
247
0.5 %
Other (1)
4,401
5.4 %
4,768
8.9 %
Total billings
81,562
100.0 %
53,008
100.0 %
GAAP adjustment (2)
(5,138)
(1,862)
Revenue reported
$
76,424
$
51,146
(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 to arrive at reported GAAP revenue. Customer billings
include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP
revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of
current period sales, (ii) recognition of certain revenue associated with product returned for treatment and destruction
and (iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in
sales in the same period the related sales are recorded. See Note 2 “Summary of Significant Accounting Policies” in
“Notes to Consolidated Financial Statements”.
The increase in billings was mainly due to an increase in the Retail ($24.5 million), Professional ($2.3 million), Long-Term Care
($0.8 million) and Pharmaceutical Manufacturer ($0.6 million) markets. Retail market billings increased 153% to $40.5 million as
compared to $16.0 million in the prior year due primarily to an increase in billings for immunization related orders of $25.3
million partially offset by a decrease in unused medications billings in the retail market of $0.7 million. Professional market
billings increased 15% to $18.0 million as compared to $15.6 million in the prior year. Long-Term Care market billings increased
25% to $4.2 million as compared to $3.3 million in the prior year due primarily to an increased volume of COVID-19 related
waste management and ancillary supplies. Pharmaceutical Manufacturer billings increased 12% to $5.2 million as compared to
$4.7 million in the prior year. Billings for Mailbacks, which represented 67.1% of total billings, increased 93% to $54.8 million
as compared to $28.4 million in the prior year primarily related to the increase in billings related to immunization related orders
and Pharmaceutical Manufacturer patient support programs. Billings for Route-based Pickup Services increased 32% to
$13.7 million as compared to $10.4 million in the prior year and represented 16.8% of total billings.
Cost of revenues for the year ended June 30, 2021 of $47.5 million was 62.2% of revenues. Cost of revenues for the year ended
June 30, 2020 of $35.4 million was 69.2% of revenue. The gross margin for the year ended June 30, 2021 of 37.8% increased
compared to the gross margin for the year ended June 30, 2020 of 30.8% due to leverage from increased revenue.
Selling, general and administrative (“SG&A”) expense for the years ended June 30, 2021 and 2020 was $15.8 million and $14.0
million, respectively, but decreased as a percentage of revenues to 21%, compared to 28% in the prior year period related to a
$0.6 million increase in management incentive compensation, including both stock and cash, a $0.3 million increase in board
compensation and $0.7 million due to continued investments in sales and marketing.
The Company recorded operating income of $12.3 million for the year ended June 30, 2021 compared to operating income of
$0.9 million for the year ended June 30, 2020. Operating income increased due to higher gross margin partially offset by higher
SG&A expense (discussed above).
The Company recorded other income of $2.0 million for the year ended June 30, 2021 compared to other expense of $0.2 million
for the year ended June 30, 2020. Other income increased due to the gain recorded in 2021 for the forgiveness of the Company's
PPP Loan by the SBA in the amount of $2.2 million.
The Company reported income before income taxes of $14.3 million for the year ended June 30, 2021 versus income before
income taxes of $0.7 million for the year ended June 30, 2020. Income before income taxes increased due to the increase in
operating income and the gain on forgiveness of the PPP Loan (discussed above).
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26
The Company’s effective tax rate for the years ended June 30, 2021 and 2020 was 10% and (232)%, respectively. The 2021 tax
expense includes: (i) a net tax benefit of $1.5 million (or 10.5% of income before income taxes) associated with stock-based
compensation, (ii) an increase to tax expense of $0.4 million (or 2.7% of income before taxes) for non-deductible compensation
and (iii) a tax benefit of $0.5 million (or 3.2% of income before taxes) associated with the permanent exclusion of the book
income recorded as a result of the PPP Loan forgiveness from taxable income. The 2020 effective tax rate is primarily due to a
$1.7 million income tax benefit as a result of the release of the tax valuation allowance on the basis of the Company's
reassessment of the recoverability of its deferred tax assets.
The Company reported net income of $12.9 million for the year ended June 30, 2021 compared to net income of $2.3 million for
the year ended June 30, 2020. Net income increased due to the increase in income before taxes and the lower effective tax rate
(discussed above).
The Company reported basic and diluted income per share of $0.78 and $0.76, respectively for the year ended June 30, 2021
versus basic and diluted income per share of $0.14 for the year ended June 30, 2020. Basic and diluted income per share increased
due to the increase in net income (discussed above).
YEAR ENDED JUNE 30, 2020 AS COMPARED TO YEAR ENDED JUNE 30, 2019
Total revenues for the fiscal year ended June 30, 2020 of $51.1 million increased by $6.8 million, or 15.4%, from the total
revenues for the fiscal year ended June 30, 2019 of $44.3 million. The increase in revenue is mainly due to increased billings in
the Retail, Home Health Care, Long-Term Care, Professional and Pharmaceutical Manufacturer market. The increase in billings
is partially offset by current year deferred revenue net of product returns on sales in prior periods. Billings by market are as
follows (in thousands):
Year Ended June 30,
2020
2019
Variance
BILLINGS BY MARKET:
Retail
$
16,033 $
11,481 $
4,552
Professional
15,637
15,071
566
Home Health Care
9,938
7,800
2,138
Pharmaceutical Manufacturer
4,661
4,146
515
Long-Term Care
3,324
2,542
782
Government
2,292
2,468
(176)
Environmental
247
290
(43)
Other
876
1,175
(299)
Subtotal
53,008
44,973
8,035
GAAP Adjustment *
(1,862)
(661)
(1,201)
Revenue Reported
$
51,146 $
44,312 $
6,834
*Represents the net impact of the revenue recognition adjustments to arrive at reported GAAP revenue. Customer billings
include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue
includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period
sales, (ii) recognition of certain revenue associated with product returned for treatment and destruction and (iii) provisions for
certain product returns and discounts to customers which are accounted for as reductions in sales in the same period the
related sales are recorded. See Note 2 “Summary of Significant Accounting Policies” in “Notes to Consolidated Financial
Statements”.
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27
The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total
billings):
Year Ended June 30,
2020
% Total
2019
% Total
BILLINGS BY SOLUTION:
Mailbacks
$
28,440
53.7 % $
25,162
55.9 %
Route-based pickup services
10,390
19.6 %
9,029
20.1 %
Unused medications
9,163
17.3 %
6,936
15.4 %
Third party treatment services
247
0.5 %
290
0.6 %
Other (1)
4,768
8.9 %
3,556
8.0 %
Total billings
53,008
100.0 %
44,973
100.0 %
GAAP adjustment (2)
(1,862)
(661)
Revenue reported
$
51,146
$
44,312
(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 to arrive at reported GAAP revenue. Customer billings
include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP
revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of
current period sales, (ii) recognition of certain revenue associated with product returned for treatment and destruction
and (iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in
sales in the same period the related sales are recorded. See Note 2 “Summary of Significant Accounting Policies” in
“Notes to Consolidated Financial Statements”.
The increase in billings was primarily attributable to increased billings in the Retail ($4.6 million), Home Health Care ($2.1
million), Long-Term Care ($0.8 million), Professional ($0.6 million), and Pharmaceutical Manufacturer ($0.5 million) markets.
The increase in Retail billings was due mainly to a $2.2 million increase in flu shot-related orders and increased unused
medication billings of $2.0 million including both MedSafe and TakeAway Recovery System envelopes. The increase in Home
Health Care billings was due primarily to an expanded relationship with a major healthcare distributor. Long-Term Care market
billings increased primarily due to increased COVID-19 related waste management and ancillary supplies. The increase in
Professional market billings reflected organic growth as the Company continued its focus on securing customers from the small
to medium quantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and
other healthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery System™ and the
Company’s route-based pick-up services. The overall increase in Professional market billings from organic growth was partially
offset by decreases from mid March 2020 through early June 2020 related to state mandated closures associated with the
COVID-19 pandemic that temporarily closed some of our dental, physician and other customer facilities. Most of the affected
customers have since re-opened. Pharmaceutical Manufacturer billings increased primarily due to inventory builds for several
current and new patient support programs. Billings for Mailbacks in the year ended June 30, 2020 increased 13% to $28.4
million as compared to $25.2 million in 2019 and represented 53.7% of total billings is primarily due to flu shot-related orders
in our retail market. Billings for Route-Based Pickup Services increased 15% to $10.4 million in the year ended June 30, 2020
due to organic growth as compared to $9.0 million in 2019 and represented 19.6% of total billings. Billings for Unused
Medications increased 32% to $9.2 million in the year ended June 30, 2020 as compared to $6.9 million in 2019 due to retail
market sales of both MedSafe and TakeAway Recovery System envelopes and represented 17.3% of total billings.
Cost of revenues for the year ended June 30, 2020 of $35.4 million was 69.2% of revenue. Cost of revenue for the year ended
June 30, 2019 of $31.0 million was 70.1% of revenue. The gross margin for the year ended June 30, 2020 of 30.8% increased
compared to the gross margin for the year ended June 30, 2019 of 29.9%. Gross margin was positively impacted for the year
ended June 30, 2020 due to higher revenues than the prior year.
Selling, general and administrative (“SG&A”) expenses for the years ended June 30, 2020 and 2019 were $14.0 million and
$12.0 million, respectively. The increase in SG&A expense was due to continued investments in sales and marketing as well as
increased professional fees.
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The Company recorded operating income of $0.9 million for the year ended June 30, 2020 compared to an operating income of
$0.4 million for the year ended June 30, 2019. The operating income increased mainly due to higher revenue and higher gross
margin (discussed above) partially offset by higher SG&A expense.
The Company reported income before income taxes of $0.7 million for the year ended June 30, 2020 compared to income
before income taxes of $0.4 million for the year ended June 30, 2019. 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, 2020 and 2019 was (232)% and 44%, respectively. The 2020
effective tax rate is primarily due to a $1.7 million income tax benefit as a result of the release of the tax valuation allowance on
the basis of the Company's reassessment of the recoverability of its deferred tax assets.
The Company reported a net income of $2.3 million for the year ended June 30, 2020 compared to a net income of $0.2 million
for the year ended June 30, 2019. Net income increased due to the increase in operating income (discussed above) and to the
non-cash benefit recorded to income tax expense resulting from the release of the valuation allowance of approximately $1.7
million.
The Company reported basic and diluted income per share of $0.14 for the year ended June 30, 2020 versus basic and diluted
income per share of $0.01 for the year ended June 30, 2019. Basic and diluted income per share increased due to the increase in
net income (discussed above).
PROSPECTS FOR THE FUTURE
As a result of the COVID-19 outbreak, the Company has implemented some and may take additional precautionary measures
intended to help ensure the well-being of its employees, facilitate continued uninterrupted servicing of customers and minimize
business disruptions. For example, the following have recently been implemented to address some of the uncertainties related to
COVID-19:
•
Since January 2020, the Company has increased its headcount for route-based drivers, plant and operations personnel
by 10% as a result of COVID-19 to make sure that its operations and servicing of customers would not be adversely
affected by the potential absence of employees due to COVID-19. The cost of this increased headcount which is
recorded as cost of sales is about $0.1 million per quarter.
•
The Company temporarily increased pay to route-based drivers, plant and operations personnel through June 30, 2020
due to the additional potential risks associated with those functions in light of the COVID-19 environment.
•
While some areas of the business have seen increased revenue, COVID-19 caused many of the Company’s customers
to temporarily close from mid-March 2020 through June 2020. For example, there have been temporary closures of
approximately 1,000 customer offices including dental, dermatology and physician practices which equates to almost
$0.1 million per month in lost revenue. Most of these offices have now re-opened.
•
The Company is considered an essential business and could incur elevated costs to maintain uninterrupted essential
support to its customers and the overall healthcare industry.
•
Since June 30, 2019, inventory levels have been increased (approximately 47%), which has also precipitated the need
for additional warehouse space for the Company’s products. The Company is working to ensure it has adequate
products and solutions to address the potential additional needs that could reasonably be expected to follow a
pandemic of this magnitude. Whether it be supporting an expected significant increase in seasonal flu immunizations,
facilitating the proper collection, transportation and treatment of syringes utilized in the administration of the
COVID-19 vaccine, or supporting the pick-up and processing of increased volumes of healthcare waste from the long-
term care industry, we are well positioned to take advantage of these growth opportunities.
To date, external effects from the COVID-19 pandemic did not have a material adverse impact on the Company’s financial
position and results of operations for the year ended June 30, 2021. The full extent of the future impacts of COVID-19 on the
Company's operations is uncertain. A prolonged outbreak and the resulting impacts of a potential worsening of global economic
conditions and the continued disruptions to, and volatility in, the credit and financial markets and consumer spending could
have a material adverse impact on the financial results and business operations of the Company.
The full extent of the future impacts of COVID-19 on the Company's operations is uncertain. A prolonged outbreak could have
a material adverse impact on the financial results and business operations of the Company. To date, the Company has not
identified any material adverse impact of COVID-19 on its financial position and results of operations.
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29
The Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare
facilities, pharmaceutical manufacturers, home healthcare providers, long-term care, retail pharmacies and clinics and the
professional market comprised of physicians, dentists, surgery centers, veterinary practices and other healthcare facilities. These
markets require cost-effective services for managing medical, pharmaceutical and hazardous 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, labs, dialysis centers and other healthcare facilities. This regulated market consists of
small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower
cost to service with solutions to match individual facility needs. The Company has made ongoing investments in sales
and marketing initiative to drive growth. Our sales team focuses on larger-dollar and nationwide opportunities where
we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical
waste management offering. Through targeted telemarketing initiatives, e-commerce driven website and web-based
promotional activities, we believe we can drive significant additional growth as we increase awareness of the
Company's innovative solution offerings with a focus on individual or small group professional offices, government
agencies, smaller retail pharmacies and clinics and long-term care facilities. The Company is able to compete more
aggressively in the medium quantity generator market with the addition of route-based services where the mailback
may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing over
80% of the U.S. population.
•
From July 2015 to July 2016, the Company acquired three route-based pickup service companies, which strengthened
the Company's position in the Northeast. Through a combination of acquisition and organic growth, the Company
now offers route-based pickup services in a thirty-seven (37) state region of the South, Southeast, Southwest,
Midwest and Northeast portions of the United States. To facilitate operational efficiencies, the Company has opened
transfer stations and offices in strategic locations. The Company directly serves more than 16,200 customer locations
with route-based pickup services. With the addition of these route-based pickup regions and the network of medical
and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product
portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of
waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this
pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the
mailback and pickup service are integrated into the offering.
•
The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2019 Population
Estimates and National Projections, the nation's 65-and-older population has grown rapidly since 2010 (34.2% over
the past decade), 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, the Company delivers value as a single-source provider with blended mailback and route-based pickup
services matched to the waste volumes of each facility.
•
The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses
on driving increased promotion of the Sharps Recovery System. According to the Centers for Disease Control
("CDC"), 44.9% of U.S. adults received a flu shot, and 32.2% of flu shots for adults were administered in a retail
clinic in 2018. Over the flu seasons from 2011 to 2020, the Company saw a growth in the retail flu shot related orders
in seven years of 10% to 36%, including a 25% increase in 2020, and declines in three years of 13% to 17%. Despite
the volatility, Sharps believes the retail market should continue to contribute to long-term growth for the Company as
consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.
•
The passage of regulations for ultimate-user medication disposal allows the Company to offer new solutions
(MedSafe and TakeAway Medication Recovery 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 long-term care 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 Sharps Recovery 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 government agencies in need of proper and
regulatory compliant medication disposal. The federal government, state agencies and non-profits recognize the need
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30
to fund programs that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for
proper medication disposal 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 Sharps Recovery System, continues to offer the best option for proper sharps disposal at an
affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-
dollar, self-injectable medications, including 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 unused medication disposal solutions. The Company offers a variety of services to meet these
needs, including the Sharps Secure Needle Disposal System, 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 Medication Recovery System), mailback services for DEA registrant expired inventory of controlled
substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback
services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities
(TakeAway Recycle System).
•
COVID-19 prompted healthcare demands and opportunities including the expected significant increase in seasonal flu
immunizations, facilitating the proper collection, transportation and treatment of syringes utilized in the
administration of the COVID-19 vaccine, or supporting the pick-up and processing of the significantly increased
volumes of healthcare waste from the long-term care industry.
•
The Company’s financial position with a cash balance of $27.8 million (used for working capital needs), debt of
$4.1 million and additional availability under the Credit and Loan Agreements as of June 30, 2021 (used to support
working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant
compliance).
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company’s current cash resources (cash on hand and cash flows from operations) will be
sufficient to fund operations for at least the next twelve months. Operating cash flows and the capacity from the Credit and
Loan Agreements are the Company’s primary sources of liquidity.
Cash Flow
Cash flow has historically been primarily influenced by demand for products and services, operating margins and related
working capital needs as well as more strategic activities including acquisitions, stock repurchases and fixed asset additions.
Cash increased by $22.4 million to $27.8 million at June 30, 2021 from $5.4 million at June 30, 2020 due to the following:
•
Cash Flows from Operating Activities - Cash flow from operating activities was positively impacted by increased
income and an increase in working capital.
•
Cash Flows from Investing Activities - Cash flow from investing activities is for permitting and capital expenditures
for plant and equipment additions of $2.9 million, including approximately $1.0 million and $0.5 million for
expenditures at the Company's treatment facilities in Carthage, Texas and Nesquehoning, Pennsylvania, respectively.
•
Cash Flows from Financing Activities – Cash flow from financing activities provided an increase in cash from
proceeds from long-term debt of $1.0 million and proceeds from the exercise of stock options of $3.2 million offset by
the repayment of debt of $0.8 million.
Credit Facility
On March 29, 2017, the Company entered into a credit agreement with a commercial bank which was subsequently amended on
June 29, 2018 and on December 28, 2020 (the "Credit Agreement"). The Credit Agreement, which expires on December 28,
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31
2023, provides for a $14 million committed credit facility that can be increased to $18 million upon the Company's request. The
proceeds of the Credit Agreement may be utilized as follows: (i) $6 million for working capital, letters of credit (up to $2.0
million) and general corporate purposes, (ii) $8 million for acquisitions and (iii) an additional $4 million for working capital,
upon the Company's request. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets
with advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as
defined in the Credit Agreement) equal to 80% of eligible accounts receivable plus the lesser of (i) 50% of eligible inventory
and (ii) $3 million. Advances under the acquisition portion 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 the borrowing. Borrowings bear interest at the greater of
(a) one-half 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 the Company’s cash flow leverage ratio. The interest rate as of June 30, 2021 was approximately
3.0%. The Company pays a fee of 0.25% per annum on the unused amount of the credit facility. No amounts were outstanding
under the working capital portion of the credit facility at June 30, 2021.
On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master
Equipment Finance Agreement with the Company's existing commercial bank (collectively, the “Loan Agreement”). The Loan
Agreement provides for a five-year, $3.2 million facility, the proceeds of which are to be utilized for expenditures to facilitate
future growth at the Company’s treatment facility in Carthage, Texas (the “Texas Treatment Facility”) as follows: (i)
$2.0 million for planned improvements and (ii) $1.2 million for equipment. Indebtedness under the Loan Agreement is secured
by the Company’s real estate investment and equipment at the Texas Treatment Facility. Advances under the Loan Agreement
mature five years from the Closing Date (August 21, 2019) with monthly payments beginning in the month after the advancing
period ends. The advancing period extended through January 15, 2021 and August 2020 for the real estate portion and the
equipment portion of the Loan Agreement, respectively. Borrowings during the advancing period for the real estate portion and
for the entire term of the equipment portion of the Loan Agreement bear interest computed at the One Month ICE LIBOR, plus
two-hundred and fifty (250) basis points which was a rate of 2.73% on June 30, 2021. The Company 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 at 4.15%.
On January 22, 2021, certain wholly owned subsidiaries of the Company entered into a real estate term loan agreement (the
"Real Estate Loan Agreement") with its existing commercial bank. The Real Estate Loan Agreement provides for a five-year,
$0.9 million facility, the proceeds of which have been utilized to purchase the property in Pennsylvania which had previously
been leased by the Company for its operations. The Real Estate Loan Agreement matures five years from January 22, 2021 with
monthly payments based on a 20-year amortization and bears interest at 4.0%.
On April 20, 2020, the Company received loan proceeds of $2.2 million under the Paycheck Protection Program (“PPP”) under
a promissory note from its existing commercial bank (the “PPP Loan”). The PPP, established as part of the CARES Act,
provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying
business. The loans and accrued interest may be forgivable as long as the borrower uses the loan proceeds for eligible purposes,
including payroll, benefits, rent and utilities, and maintains its payroll levels. On June 15, 2021, the Company received a
notification from its existing commercial bank that the Small Business Administration ("SBA") fully approved the Company's
PPP Loan forgiveness request and that the PPP Loan, reflected in the Company’s balance sheet as Long-Term Debt, was
forgiven. The Company recognized the gain on forgiveness of PPP loan in the financial statements during the fourth quarter of
the year ending June 30, 2021. Although the PPP Loan has been forgiven, records are to be maintained for at least six years
following the date of forgiveness as the SBA may still audit the eligibility of the Company's receipt of the PPP Loan proceeds.
To the extent the eligibility is challenged, the Company may have to repay all or part of the PPP Loan.
The Company has availability under the Credit Agreement of $13.9 million ($5.9 million for the working capital and
$8.0 million for the acquisitions) as of June 30, 2021 with the option to extend up to $17.9 million. The Company also had
$0.1 million in letters of credit outstanding as of June 30, 2021.
The Credit and Loan Agreements contains affirmative and negative covenants that, among other things, require the Company to
maintain a maximum cash flow leverage ratio of no more than 3.0 to 1.0 and a minimum debt service coverage ratio of not less
than 1.15 to 1.00. The Credit and Loan Agreements also contains customary events of default which, if uncured, may terminate
the agreements and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the
amount available under the Credit and Loan Agreements. The Company was in compliance with all the financial covenants
under the Credit and Loan Agreements as of June 30, 2021.
The Company utilizes performance bonds to support operations based on certain state requirements. At June 30, 2021, the
Company had performance bonds outstanding covering financial assurance up to $1.3 million.
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CRITICAL ACCOUNTING POLICIES
Revenue Recognition: The Company recognizes revenue, net of applicable sales tax, when performance obligations are satisfied
through the transfer of control of promised goods or services 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 mailbacks sold as part
of the vendor managed inventory ("VMI") program. Shipping and handling are considered separate performance obligations for
mailbacks sold under 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 the route-based pickup services, revenue is recognized in the
amount to which the Company has a right to invoice pursuant to the right to invoice practical expedient. Provisions for certain
rebates, product returns and discounts to customers are estimated at the inception of the 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,
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 contract categories, the Company’s solutions have a single
performance obligation. The Company's mailbacks and unused medication solutions have revenue producing components that
are recognized over multiple delivery points (Sharps Recovery System and various other solutions like the MedSafe and
TakeAway Medication Recovery Systems referred to as “mailbacks” or "unused medications") 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, for outbound transportation. For contracts with multiple performance obligations, an estimated stand-alone selling
price is determined for all performance obligations. The consideration is then allocated to the performance obligations based on
their relative stand-alone selling price. The selling price for performance obligations for transportation and treatment utilizes
third party evidence. The Company estimates the selling price of the compliance and container 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 customer has control. The allocated transaction price for the return transportation and treatment revenue is
recognized when the customer returns the compliance and container system and the container has been received at the
Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative
logistics provider to the Company’s owned or contracted facilities at which point the destruction or conversion and proof of
receipt and treatment are performed on the container. Consideration received and allocated to the transportation and treatment
performance obligation is recorded as a contract liability until the services are performed. Through regression analysis of
historical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be
returned. Accordingly, a portion of the return transportation and treatment element is recognized at the point of sale.
Furthermore, the current and long-term portions are determined through regression analysis 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 no acceptance 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 of consideration the Company was entitled to at the point in time of satisfying the performance
obligation associated with the sale of the compliance and container system. The contract liability is related to the mailbacks and
unused medications contract type categories in which cash consideration exceeds the transaction price allocated to completed
performance obligations. Incremental costs to obtain contracts that are deemed to be recoverable, primarily related to the
payment of sales incentives for contracts in the route-based pickup service category, are capitalized as contract costs and
included in prepaids and other current assets.
Income Taxes: Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The establishment of valuation allowances requires significant judgment and is impacted by
various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of the evidence, is considered
in determining the appropriateness of recording a valuation allowance on deferred tax assets. The Company has historically
recorded a valuation allowance to reduce its deferred tax assets to an amount that is more likely than not to be realized.
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33
However, as of the year ended June 30, 2020, the Company released the full amount of the valuation allowance against its
deferred tax assets on the basis of the Company's reassessment of the recoverability of its deferred tax assets.
The Company is subject to income taxes in the United States and in numerous state tax jurisdictions. Significant judgment is
required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company accounts for
uncertain tax positions in accordance with FASB ASC 740, which prescribes the minimum recognition threshold a tax position
taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The
Company has not recognized any material uncertain tax positions for the years ended June 30, 2021, 2020 and 2019.
Accounts Receivable: Accounts receivable consist primarily of amounts due to the Company from normal business activities.
Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with
the customer. The Company maintains an allowance for doubtful accounts to reflect the likelihood of not collecting certain
accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts
receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be
collected and/or when the account has been referred to a third party collection agency. The Company has a history of minimal
uncollectible accounts.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2020, guidance for applying optional expedients and exceptions to ease the potential burden in accounting for
reference rate reform on financial reporting was issued. It is elective and applies to all entities, subject to meeting certain
criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate
expected to be discontinued because of reference rate reform on financial reporting. The provisions of the new guidance are
effective for interim periods beginning as of March 12, 2020 through December 31, 2022. There has been no material impact on
the Company's consolidated financial statements and related disclosures from the modification of its arrangements as of June
30, 2021. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations
which may impact the Company.
In June 2016, guidance for credit losses of financial instruments was issued, which requires entities to measure credit losses for
financial assets measured at amortized cost based on expected losses rather than incurred losses. The provisions of the new
guidance are effective for annual periods beginning after December 15, 2022 (effective July 1, 2023 for the Company),
including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of
evaluating the impact of the new guidance on its consolidated financial statements and related disclosures as well as evaluating
the available transition methods. The Company will continue to evaluate the standard as well as additional changes,
modifications or interpretations which may impact the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the notes thereto, and the related reports of the Company’s
independent registered public accounting firms thereon are referenced as pages F-1 to F-23 and are included herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures,” ("Disclosure Controls") as such term is defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and
forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. The
Company conducted an evaluation (the “Evaluation”), under the supervision and with the participation of the CEO and CFO, of
the effectiveness of the design and operation of our Disclosure Controls as of June 30, 2021 pursuant to Rules 13a-15(b) and
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34
15d-15(b) of the Exchange Act. In designing and evaluating the Disclosure Controls, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives and management was required to apply judgement in evaluating its controls and procedures. Based on this
Evaluation, the CEO and CFO concluded that our Disclosure Controls were effective as of June 30, 2021.
Changes in Internal Controls over Financial Reporting
During the quarter ended June 30, 2021, there were no changes in the Company’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control system over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The Company’s management, including the Company's Chief Executive Officer and President and Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to
provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the
United States.
The internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All
internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and
the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only
reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June
30, 2021. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework (2013). Based on the assessment, the Company’s
management concluded that, as of June 30, 2021, the Company’s internal control over financial reporting was effective based
on those criteria.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be
filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year relating
to its Annual Meeting of Stockholders to be held on November 18, 2021.
Section 16(a) Beneficial Ownership Reporting Compliance
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35
Section 16(a) of the Exchange Act requires our directors, executive officers, and beneficial owners of more than 10% of our
common stock to file certain beneficial ownership reports with the SEC. To our knowledge, based solely on our review of
copies of reports received by us and written representations by certain reporting persons, we believe that during fiscal year
2021, all Section 16(a) filing requirements applicable to our officers, directors, and persons who own more than 10% of our
common stocks were complied with in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be
filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year, relating
to its Annual Meeting of Stockholders to be held on November 18, 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be
filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year, relating
to its Annual Meeting of Stockholders to be held on November 18, 2021.
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 Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year, relating
to its Annual Meeting of Stockholders to be held on November 18, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be
filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year, relating
to its Annual Meeting of Stockholders to be held on November 18, 2021.
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36
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
2.1
Agreement for Purchase and Sale of LLC Units dated July 1, 2016 by and between Sharps Compliance, Inc. and
Citiwaste, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on
July 6, 2016).
3.1
Amended and Restated Certificate of Incorporation of U.S. Medical Systems, Inc. (incorporated by reference from
Exhibit 3.5 to the Registrant’s Transition Report on Form 10KSB40 (File No. 000-22390; Film No. 98716804), filed
on September 29, 1998).
3.2
Certificate of Elimination of the Series A 10% Voting Convertible Preferred Stock of Sharps Compliance Corp.
(incorporated by reference from Exhibit 3.6 to Form 10KSB40 (File No. 000-22390; Film No. 98716804), filed
September 29, 1998).
3.3
Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference from
Exhibit 3.3 to the Registrant's Annual Report on Form 10-K), filed on August 28, 2019.
3.4
Amended and Restated Bylaws of Sharps Compliance Corp dated May 23, 1994 (incorporated by reference to
Exhibit 3.2 to Form 8-K, filed November 19, 2010).
4.1
Specimen Stock Certificate (incorporate by reference from Exhibit 4.4 to form 10KSB40 (File No. 000-22390; Film
No. 98716804), filed September 29, 1998)
4.2
Description of Registrant’s Securities (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on
Form 10-K (File No. 001-34269; Film No. 201138112), filed August 26, 2020)
10.1
Form of Restricted Stock Award Agreement (file herewith)*
10.2
Sharps Compliance Corp. 2010 Stock Plan Amendment dated November 22, 2010, as amended on September 11,
2014 (incorporated by reference to Annex A of the Registrant’s Proxy Statement on Schedule 14A, filed October 1,
2014).*
10.3
Lease Agreement dated as of July 13, 2006, between Sharps Compliance, Inc. and Warehouse Associates Corporate
Centre Kirby II, Ltd. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(File No. 000-22390; Film No. 06962703), filed July 14, 2006).
10.4
Lease Termination Agreement dated as of July 13, 2006, between Sharps Compliance, Inc., Warehouse Associates
Corporate Centre Kirby, Ltd. and Warehouse Associates Corporate Centre Kirby II, Ltd. (incorporated by reference
to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-22390; Film No. 06962703), filed July
14, 2006).
10.5
Second Amendment to Lease Agreement between Sharps Compliance, Inc. and Warehouse Associates Corporate
Centre Kirby II, ltd. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File
No. 001-34269; Film No. 10667451), filed March 9, 2010).
10.6
Third Amendment to Lease Agreement dated February 6, 2015, between Sharps Compliance, Inc. and Warehouse
Associates Corporate Centre Kirby II, Ltd. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K, filed on February 17, 2015).
10.7
Fourth Amendment to Lease Agreement dated August 5, 2015, between Sharps Compliance Inc. and Warehouse
Associates Corporate Centre Kirby IV, Ltd. (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual
Report on Form 10-K, filed on August 26, 2015).
10.8
Lease Agreement dated as of January 30, 2009, between Sharps Compliance, Inc. and Park 288 Industrial, LLC
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-22390;
Film No. 09565104), filed February 3, 2009).
10.9
Amended Lease Agreement dated as of May 27, 2009, between Sharps Compliance, Inc. and Park 288 Industrial,
LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
001-24269; Film No. 09866215), filed June 2, 2009).
10.10
Fourth 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).
10.11
Loan Agreement dated March 29, 2017, by and between Sharps Compliance, Inc. of Texas and a commercial bank
(incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on April 3, 2017).
10.12
Second Modification Agreement dated December 28, 2020, by and between Sharps Compliance, Inc. of Texas and a
commercial bank and several guarantors as set forth therein (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed on December 31, 2020).
10.13
Executive Employment Agreement Amendment by and between Sharps Compliance Corp. and David P. Tusa dated
June 14, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
001-34269; Film No. 10893750), filed June 14, 2010). *
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37
10.14
Executive Employment Agreement Amendment between Sharps Compliance Corp. and David P. Tusa dated
March 6, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed
March 7, 2012).*
10.15
Executive 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).*
10.16
Employment Agreement by and between Sharps Compliance Corp. and Diana P. Diaz dated June 14, 2010
(incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K(File No. 001-34269;
Film No. 10893750), filed June 14, 2010).*
10.17
Executive Employment Agreement Amendment between Sharps Compliance Corp. and Diana P. Diaz dated March
6, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed March 7,
2012).*
10.18
Executive 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).*
10.19
Employment Agreement by and between Sharps Compliance, Inc. and Gregory C. Davis dated May 18, 2011
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-34269;
Film No. 11866772), filed May 24, 2011).*
10.20
Lease between SIT Realty LLC and Sharps Compliance, Inc., dated as of September 28, 2016 (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 3, 2016).
10.21
First 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).
10.22
Fifth 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.
10.23
Construction 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).
10.24
Master 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).
10.25
Fifth 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 September 20, 2019).
10.26
Promissory Note dated April 20, 2020, between Sharps Compliance, Inc. of Texas and [REDACTED]
(incorporated by reference to Exhibit 10.1 to the Regustrant's Current Report on Form 8-K, filed on April 21,
2020).
10.27
Lease Agreement dated May 11, 2020, between Sharps Compliance, Inc of Texas and [REDACTED], a
Pennsylvania limited liability company (incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K, filed on May 15, 2020).
10.28
Executive Employment Agreement Amendment by and between Sharps Compliance Corp. and David P. Tusa
dated April 8, 2021 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
filed April 8, 2021).*
10.29
Agreement Amendment by and between Sharps Compliance Corp. and Diana P. Diaz dated April 8, 2021
(incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed April 8, 2021).*
10.30
Term Loan Agreement by and between certain wholly owned subsidiaries of Sharps Compliance Corp. and a
commercial bank, dated January 22, 2021 (incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K, filed on January 22, 2021).
21.1
Subsidiaries of Sharps Compliance Corp. (filed herewith).
23.1
Consent of BDO USA, LLP (filed herewith).
31.1
Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act (filed
herewith).
31.2
Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act (filed herewith).
32.1+
Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act.
32.2+
Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act.
101.INS Inline XBRL Instance Document (filed herewith)
101.SCH Inline XBRL Schema Document (filed herewith)
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38
101.CAL Inline XBRL Calculation Linkbase Document (filed herewith)
101.DEF Inline XBRL Definition Linkbase Document (filed herewith)
101.LAB Inline XBRL Label Linkbase Document (filed herewith)
101.PRE Inline XBRL Presentation Linkbase Document (filed herewith)
104
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)
*
This exhibit is a management contract or a compensatory plan or arrangement.
+
This certification is deemed furnished 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
by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
ITEM 16. FORM 10-K SUMMARY
None.
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39
SIGNATURES
Pursuant 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 the undersigned, thereunto duly authorized.
SHARPS COMPLIANCE CORP.
Dated: August 25, 2021
By: /s/ DAVID P. TUSA
David P. Tusa
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: August 25, 2021
By: /s/ DAVID P. TUSA
David P. Tusa
Chief Executive Officer and President and Director
(Principal Executive Officer)
Dated: August 25, 2021
By: /s/ DIANA P. DIAZ
Diana P. Diaz
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: August 25, 2021
By: /s/ SHARON R. GABRIELSON
Sharon R. Gabrielson
Chair of the Board of Directors
Dated: August 25, 2021
By: /s/ SUSAN N. VOGT
Susan N. Vogt
Director
Dated: August 25, 2021
By: /s/ PARRIS H. HOLMES
Parris H. Holmes
Director
Dated: August 25, 2021
By: /s/ WILLIAM PATRICK MULLOY II
William Patrick Mulloy II
Director
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40
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of June 30, 2021 and 2020
F-3
Consolidated Statements of Operations for the Years Ended June 30, 2021, 2020 and 2019
F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2021, 2020 and 2019
F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 2021, 2020 and 2019
F-6
Notes to Consolidated Financial Statements
F-7
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F-1
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Sharps Compliance Corp.
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sharps Compliance Corp. (the “Company”) as of June 30,
2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three
years in the period ended June 30, 2021, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of the Company at June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the
period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s consolidated 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 the applicable 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 reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, 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 an understanding of internal control over
financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
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 disclosures in 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate
opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Mailbacks and Unused Medication Solution Revenues
As described in Note 2 to the consolidated financial statements, the Company’s mailbacks and unused medication solution
revenues include revenue allocated to: (i) sale of compliance and container systems, and (ii) return transportation and treatment
service. For the year ended June 30, 2021, the Company reported revenues for these solutions of $57.8 million. The Company
estimates a standalone selling price for each performance obligation and recognizes the related revenue when the performance
obligations have been satisfied. For the compliance and container system revenue, the Company estimates standalone selling
price based on the product and services provided, including the expected cost plus a margin. This revenue is recognized when
the compliance and container system is delivered to the customer. For return transportation and treatment service revenue, the
allocated revenue is recognized when the customer returns the compliance and container system to the Company. In certain
cases, the compliance and container system is not returned to the Company. The Company estimates the percentage of
compliance and container systems it does not expect to be returned based on historical and expected future return rates and
recognizes that revenue at the point of sale to the customer.
We identified the estimates used to determine the standalone selling prices for the compliance and container system and the
estimates used to determine the expected return rates for transportation and treatment services as a critical audit matter.
Management applies significant judgment to determine the standalone selling price of the compliance and container system
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F-2
performance obligation and applies significant judgment to determine the expected return rates. Auditing this matter involved
especially challenging auditor judgment due to the nature and extent of audit effort required to address this matter.
The primary procedures we performed to address this critical audit matter included:
a.
Evaluating the reasonableness of management’s judgments and assumptions used in determining the stand-alone
selling price for the compliance and container system through: (i) assessing the appropriateness of the method used by
management to determine cost, including the overhead allocation, and expected margin, (ii) evaluating the factors
considered by management in determining the overhead allocation, and (iii) comparing expected margin used by
management to historical margin.
b.
Evaluating the reasonableness of management’s judgments and assumptions used in determining the expected return
rates for transportation and treatment services through: (i) reviewing subsequent returns of container systems that had
been sold in a previous year in order to perform a retrospective review of previous estimates of return rates, (ii)
comparing the expected return rates to historical return rates, and (iii) testing a sample of returns and the underlying
shipping documentation to evaluate the accuracy of the data used in the determination of the return rates.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2014.
Houston, Texas
August 25, 2021
Table of Contents
F-3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value amounts)
June 30,
2021
2020
ASSETS
CURRENT ASSETS
Cash
$
27,767 $
5,416
Accounts receivable, net
9,738
11,789
Inventory
6,114
5,638
Contract asset
20
156
Prepaid and other current assets
1,459
1,287
TOTAL CURRENT ASSETS
45,098
24,286
PROPERTY, PLANT AND EQUIPMENT, net
10,843
8,740
OPERATING LEASE RIGHT OF USE ASSET
8,353
8,747
FINANCING LEASE RIGHT OF USE ASSET, net
907
387
INVENTORY, net of current portion
989
1,064
OTHER ASSETS
110
154
GOODWILL
6,735
6,735
INTANGIBLE ASSETS, net
2,239
2,771
DEFERRED TAX ASSET, net
157
1,252
TOTAL ASSETS
$
75,431 $
54,136
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
2,922 $
3,291
Accrued liabilities
3,940
2,768
Operating lease liability
2,368
2,192
Financing lease liability
160
65
Current maturities of long-term debt
735
1,658
Contract liability
7,028
3,262
TOTAL CURRENT LIABILITIES
17,153
13,236
CONTRACT LIABILITY, net of current portion
1,461
705
OPERATING LEASE LIABILITY, net of current portion
6,118
6,671
FINANCING LEASE LIABILITY, net of current portion
741
337
OTHER LIABILITIES
45
104
LONG-TERM DEBT, net of current portion
3,329
3,505
TOTAL LIABILITIES
28,847
24,558
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value per share; 40,000,000 shares authorized; 17,454,859 and
16,667,572 shares issued, respectively and 17,159,244 and 16,371,957 shares outstanding,
respectively
176
168
Treasury stock, at cost, 295,615 shares repurchased
(1,554)
(1,554)
Additional paid-in capital
34,333
30,203
Retained earnings
13,629
761
TOTAL STOCKHOLDERS’ EQUITY
46,584
29,578
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
75,431 $
54,136
See accompanying notes to consolidated financial statements
Table of Contents
F-4
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share data)
Year Ended June 30,
2021
2020
2019
REVENUES
$
76,424 $
51,146 $
44,312
Cost of revenues
47,514
35,384
31,042
GROSS PROFIT
28,910
15,762
13,270
Selling, general and administrative
15,761
14,046
12,003
Depreciation and amortization
847
806
820
OPERATING INCOME
12,302
910
447
OTHER INCOME (EXPENSE)
Interest income
—
14
24
Interest expense
(194)
(127)
(87)
Income (loss) associated with derivative instrument
47
(113)
—
Gain on forgiveness of PPP loan
2,183
—
—
TOTAL OTHER INCOME (EXPENSE)
2,036
(226)
(63)
INCOME BEFORE INCOME TAXES
14,338
684
384
INCOME TAX EXPENSE (BENEFIT)
Current
375
(87)
(81)
Deferred
1,095
(1,495)
251
TOTAL INCOME TAX EXPENSE (BENEFIT)
1,470
(1,582)
170
NET INCOME
$
12,868 $
2,266 $
214
NET INCOME PER COMMON SHARE
Basic
$
0.78 $
0.14 $
0.01
Diluted
$
0.76 $
0.14 $
0.01
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
INCOME PER COMMON SHARE:
Basic
16,593
16,249
16,116
Diluted
17,028
16,431
16,123
See accompanying notes to consolidated financial statements
Table of Contents
F-5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common Stock
Treasury Stock
Shares
Amount
Shares
Amount
Additional
Paid-
in Capital
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
Balances, June 30, 2018
16,377,636
$
164
(295,615) $ (1,554) $
28,621
$
(2,057) $
25,174
Stock-based compensation
—
—
—
—
400
—
400
Issuance of restricted stock
55,492
1
—
—
(1)
—
—
Cumulative effect of new accounting
standard (Note 2)
—
—
—
—
—
338
338
Net income
—
—
—
—
—
214
214
Balances, June 30, 2019
16,433,128
165
(295,615) (1,554)
29,020
(1,505)
26,126
Exercise of stock options
154,444
2
—
—
666
—
668
Stock-based compensation
—
—
—
—
518
—
518
Issuance of restricted stock
80,000
1
—
—
(1)
—
—
Net income
—
—
—
—
—
2,266
2,266
Balances, June 30, 2020
16,667,572
168
(295,615) (1,554)
30,203
761
29,578
Exercise of stock options
712,394
7
—
—
3,157
—
3,164
Stock-based compensation
—
—
—
—
974
—
974
Issuance of restricted stock
74,893
1
—
—
(1)
—
—
Net income
—
—
—
—
—
12,868
12,868
Balances, June 30, 2021
17,454,859
$
176
(295,615) $ (1,554) $
34,333
$
13,629
$
46,584
See accompanying notes to consolidated financial statements
Table of Contents
F-6
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended June 30,
2021
2020
2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
12,868 $
2,266 $
214
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
1,989
1,606
1,663
Bad debt expense
157
111
81
Non-cash lease expense
—
—
46
Inventory write-offs
131
29
55
Loss on disposal of property, plant and equipment
1
16
21
Stock-based compensation expense
974
518
400
(Income) loss associated with derivative instrument
(47)
113
—
Deferred tax expense (benefit)
1,095
(1,495)
251
Vendor receivable write-off
—
657
—
Gain on forgiveness of PPP loan
(2,183)
—
—
Changes in operating assets and liabilities:
Accounts receivable
1,894
(2,971)
(3,000)
Inventory
(532)
(1,887)
(492)
Prepaid and other assets
(128)
(373)
(531)
Accounts payable and accrued liabilities
1,080
1,036
1,498
Contract asset and contract liability
4,658
1,066
719
NET CASH PROVIDED BY OPERATING ACTIVITIES
21,957
692
925
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment
(2,803)
(3,969)
(749)
Proceeds from sale of property, plant and equipment
3
3
—
Additions to intangible assets
(82)
(188)
(282)
NET CASH USED IN INVESTING ACTIVITIES
(2,882)
(4,154)
(1,031)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options
3,164
668
—
Proceeds of long-term debt
973
4,265
—
Repayments of long-term debt
(762)
(517)
(537)
Payments on financing lease liabilities
(99)
—
—
Payments of debt issuance costs
—
(50)
—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
3,276
4,366
(537)
NET INCREASE (DECREASE) IN CASH
22,351
904
(643)
CASH, beginning of year
5,416
4,512
5,155
CASH, end of year
$
27,767 $
5,416 $
4,512
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid, net of refunds
$
128 $
99 $
37
Interest paid on long-term debt
$
193 $
127 $
89
NON-CASH INVESTING ACTIVITIES:
Transfer of equipment to inventory
$
— $
28 $
393
Property, plant and equipment financed through accounts payable
$
(272) $
331 $
12
Purchase of previously leased property, plant and equipment financed
with note payable
$
873 $
— $
—
See accompanying notes to consolidated financial statements
Table of Contents
F-7
NOTE 1 - ORGANIZATION AND BACKGROUND
Organization: The accompanying consolidated financial statements include the financial transactions and accounts of Sharps
Compliance Corp. and its wholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.), Sharps
e-Tools.com Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc., Sharps Environmental Services, Inc. (dba Sharps
Environmental Services of Texas, Inc.), Sharps Safety, Inc., Alpha Bio/Med Services LLC, Bio-Team Mobile LLC and
Citiwaste, LLC and Sharps Properties, LLC (collectively, “Sharps", the “Company”, "we" or "our"). All significant
intercompany accounts and transactions have been eliminated upon consolidation.
Business: Sharps is a full-service national provider of comprehensive waste management services including medical,
pharmaceutical and hazardous for small and medium quantity generators. The Company’s solutions include Sharps Recovery
System™ (formerly Sharps Disposal by Mail System®), TakeAway Recovery System, TakeAway Medication Recovery
System™, MedSafe®, TakeAway Recycle System™, ComplianceTRACSM, SharpsTracer®, Sharps Secure® Needle Disposal
System, Complete Needle™ Collection & Disposal System, TakeAway Environmental Return System™, Pitch-It IV™ Poles,
Asset Return System and Spill Kit Recovery System. The Company also offers route-based pickup services in a thirty-seven
(37) state region of the South, Southeast, Southwest, Midwest and Northeast portions of the United States.
A novel strain of coronavirus ("COVID-19") was first identified in December 2019, and subsequently declared a global
pandemic by the World Health Organization on March 11, 2020. As a result of the outbreak, many companies have experienced
disruptions in their operations and in servicing customers. The Company has implemented some and may take additional
precautionary measures intended to help ensure the well-being of its employees, facilitate continued uninterrupted servicing of
customers and minimize business disruptions. The full extent of the future impacts of COVID-19 on the Company's operations
is uncertain. A prolonged outbreak could have a material adverse impact on the financial results and business operations of the
Company. To date, the Company has not identified any material adverse impact of COVID-19 on its financial position and
results of operations.
Concentration of Customers and Service Providers: There is an inherent concentration of credit risk associated with accounts
receivable arising from sales to major customers. For the fiscal year ended June 30, 2021, two customers represented
approximately 45% of revenues and 36%, or $3.5 million, of the total accounts receivable balance as of June 30, 2021. For the
fiscal year ended June 30, 2020, two customers represented approximately 35% of revenues and 44%, or $5.2 million, of the
total accounts receivable balance as of June 30, 2020. For the fiscal year ended June 30, 2019, two customers represented
approximately 27% of revenues. In the event a major customer is lost, the Company may be adversely affected by its
dependence on a limited number of high volume customers.
The Company currently transports (from the patient or user to the Company's facility or subcontracted treatment facilities)
many of its mailback and unused medication solution offerings using the United States Postal Service ("USPS"). The Company
also has an arrangement with United Parcel Service Inc. (“UPS”) whereby UPS transports certain other mailback and unused
medication solution offerings. Sharps maintains relationships with multiple raw materials suppliers and vendors in order to
meet customer demands and assure availability of our products and solutions. With respect to the Sharps Recovery System
solutions, the Company owns proprietary molds and dies and utilizes several contract manufacturers for the production of the
primary raw materials. Sharps believes that alternative suitable contract manufacturers are readily available to meet the
production specifications of our products and solutions. The Company utilizes national suppliers for the majority of the raw
materials used in our other products and solutions and international suppliers for Pitch-It IV Poles.
Table of Contents
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-8
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition: 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,
2021
% Total
2020
% Total
2019
% Total
REVENUES BY SOLUTION:
Mailbacks
$
49,617
64.9 % $
26,578
52.0 % $
24,501
55.2 %
Route-based pickup services
13,677
17.9 %
10,390
20.3 %
9,029
20.4 %
Unused medications
8,159
10.7 %
9,163
17.9 %
6,936
15.7 %
Third party treatment services
570
0.7 %
247
0.5 %
290
0.7 %
Other (1)
4,401
5.8 %
4,768
9.3 %
3,556
8.0 %
Total revenues
$
76,424
100.0 % $
51,146
100.0 % $
44,312
100.0 %
(1) The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items
with single performance obligations.
The Company recognizes revenue, net of applicable sales tax, when performance obligations are satisfied through the transfer
of control of promised goods or services 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 mailbacks sold as part of the vendor managed
inventory ("VMI") program. Shipping and handling are considered separate performance obligations for mailbacks sold under
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 the route-based pickup services, revenue is recognized in the amount to which
the Company has a right to invoice pursuant to the right to invoice practical expedient. Provisions for certain rebates, product
returns and discounts to customers are estimated at the inception of the 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, 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's mailbacks and unused medication solutions have revenue producing components that are recognized
over multiple delivery points (Sharps Recovery System and various other solutions like the MedSafe and TakeAway
Medication Recovery Systems referred to as “mailbacks” or "unused medications") 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, for
outbound transportation. For contracts with multiple performance obligations, an estimated stand-alone selling price is
determined for all performance obligations. The consideration is then allocated to the performance obligations based on their
relative stand-alone selling price. The selling price for performance obligations for transportation and treatment utilizes third
party evidence. The Company estimates the selling price of the compliance and container 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 customer has control. The allocated transaction price for the return transportation and treatment revenue is
recognized when the customer returns the compliance and container system and the container has been received at the
Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative
logistics provider to the Company’s owned or contracted facilities at which point the destruction or conversion and proof of
receipt and treatment are performed on the container. Consideration received and allocated to the transportation and treatment
performance obligation is recorded as a contract liability until the services are performed. Through regression analysis of
historical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be
returned. Accordingly, a portion of the return transportation and treatment element is recognized at the point of sale.
Table of Contents
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-9
Furthermore, the current and long-term portions of amounts historically referred to as deferred revenues (shown as Contract
Liability on the condensed consolidated balance sheets) are determined through regression analysis 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 no acceptance provisions and amounts are segregated in the Company’s warehouse for the customer.
For the fiscal years ended June 30, 2021, 2020 and 2019, the Company recorded billings from inventory builds that are held in
vendor managed inventory under these service agreements of $3.9 million, $3.5 million and $2.7 million, respectively. As of
June 30, 2021 and 2020, $3.7 million and $2.8 million, respectively, of solutions sold through that date were held in vendor
managed inventory pending fulfillment or shipment to patients of pharmaceutical manufacturers who offer these solutions to
patients in an ongoing patient support program.
The contract asset is related to VMI service agreements within the mailbacks contract type category when the revenue
recognition exceeds the amount of consideration the Company was entitled to at the point in time of satisfying the performance
obligation associated with the sale of the compliance and container system. The contract liability is related to the mailbacks and
unused medications contract type categories in which cash consideration exceeds the transaction price allocated to completed
performance obligations. The amount recognized for the twelve months ended June 30, 2021 and June 30, 2020 related to
contract liabilities recorded as of June 30, 2020 and 2019 were $2.8 million. and $2.7 million, respectively. Incremental costs to
obtain contracts that are deemed to be recoverable, primarily related to the payment of sales incentives for contracts in the
route-based pickup service category, are capitalized as contract costs and included in prepaids and other current assets in the
amount of $0.2 million and $0.1 million as of June 30 2021 and 2020, respectively. The amortization of capitalized sales
incentives, which is included in selling, general and administrative expense was $0.2 million and less than $0.1 million for the
years ended June 30, 2021 and 2020, respectively.
Income Taxes: Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by
various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered
in determining the appropriateness of recording a valuation allowance on deferred tax assets. The Company has historically
recorded a valuation allowance to reduce its deferred tax assets to an amount that is more likely than not to be realized.
However, during the year ended June 30, 2020, the Company released the full amount of the valuation allowance against its
deferred tax assets on the basis of the Company's reassessment of the recoverability of its deferred tax assets.
The Company is subject to income taxes in the United States and in numerous state tax jurisdictions. Significant judgment is
required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company accounts for
uncertain tax positions in accordance with FASB ASC 740, which prescribes the minimum recognition threshold a tax position
taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The
Company has not recognized any material uncertain tax positions for the years ended June 30, 2021, 2020 and 2019. 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, 2018 and after
•
State of Texas – fiscal years ended June 30, 2016 and after
•
States of California, Georgia, Pennsylvania and New York - fiscal years ended June 30, 2018 and after
•
New York City - fiscal years ended June 30, 2018 and after
•
Other States – fiscal years ended June 30, 2017 and after
None of the Company’s federal or state tax returns are currently under examination. The Company records income tax related
interest and penalties, if applicable, as a component of the provision for income tax expense. However, there were no such
amounts recognized in the consolidated statements of operations in the years ended June 30, 2021, 2020 and 2019.
Leases: The Company has operating leases for real estate, field equipment, office equipment and vehicles and financing leases
for vehicles and office equipment. Operating leases are included in Operating Lease Right of Use ("ROU") Asset and Operating
Lease Liability on the consolidated balance sheets. Financing leases are included in Financing Lease ROU Asset and Financing
Lease Liability on the consolidated balance sheets. Operating and financing lease asset and liability amounts are measured and
recognized based on discounted future cash flow payment amounts the Company expects to make over the expected term of the
Table of Contents
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-10
underlying leases, including renewal periods the Company is reasonably certain to exercise. The lease liability for leases
expected to be settled in twelve-months or less are classified as current liabilities. The general terms of the Company’s lease
agreements require monthly payments. Some of the Company’s leases escalate either by fixed or variable amounts. Certain of
the Company’s leases, which provide for variable lease payments based on index-based (i.e., the US Consumer Price Index)
adjustments to lease payments over the term of the lease, are measured at the lease rate effective at the commencement of the
lease or upon adoption, as applicable. Because the Company does not generally have access to the rate implicit in its leases, the
Company utilizes its incremental borrowing rate as the discount rate for measuring the lease liability. At commencement, the
operating lease ROU asset and lease liability are the same, with adjustments to the ROU asset for lease incentives and initial
direct costs incurred. The Company reviews all options to extend, terminate or purchase its ROU assets at the commencement
of the lease and on an ongoing basis and accounts for these options when they are reasonably certain of being exercised. The
Company evaluates lease modifications as they occur and records such as a separate lease or an adjustment to the existing ROU
asset and lease liability as appropriate. Operating lease expense is recorded on a straight-line basis over the lease term with
amortization of the ROU asset calculated as the difference between the straight-line operating lease expense and the implied
interest expense on the lease liability. Interest expense related to financing leases is calculated using the effective interest
method and amortization of the financing lease ROU asset is recorded on a straight-line basis. On the statement of cash flows,
operating lease expense is included in operating cash flows and repayment of financing leases is a financing activity.
Accounts Receivable: Accounts receivable consist primarily of amounts due to the Company from normal business activities.
Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with
the customer. The Company maintains an allowance for doubtful accounts to reflect the likelihood of not collecting certain
accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts
receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be
collected and/or when the account has been referred to a third-party collection agency. The Company has a history of minimal
uncollectible accounts. See rollforward of allowance activity below:
Allowance for Doubtful
Accounts
Balance
Beginning
of Year
Charges to
Expense
Write-offs
/Recoveries
Balance End
of Year
2021
$
162 $
157 $
(127) $
192
2020
$
132 $
111 $
(81) $
162
2019
$
102 $
81 $
(51) $
132
Stock-Based Compensation: Stock-based compensation cost for options and restricted stock awarded to employees and
directors is measured at the grant date based on the calculated fair value of the award and is recognized as an expense over the
requisite service period (generally the vesting period of the equity grant). Contingently issued awards with a requisite service
period that precedes the grant date are measured and recognized at the start of the requisite service period and remeasured each
reporting period until the grant date. Total stock-based compensation expense for the fiscal years ended June 30, 2021, 2020
and 2019 are as follows:
Year Ended June 30,
2021
2020
2019
Stock-based compensation expense included in:
Cost of revenues
$
— $
4 $
9
Selling, general and administrative
974
514
391
Total
$
974 $
518 $
400
The 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. The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key
input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option
term, the expected volatility of the Company’s stock over the option’s expected term, the risk free interest rate over the option’s
expected term and the Company’s expected annual dividend yield. The risk free interest rate is derived using the U.S. Treasury
yield curve in effect at date of grant. Volatility, expected life and dividend yield are based on historical experience and activity.
Table of Contents
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-11
The fair value of the Company’s stock options was estimated on the grant date using the Black-Scholes option-pricing model
with the following assumptions:
Year Ended June 30,
2021
2020
2019
Weighted average risk-free interest rate
0.2 %
0.3 %
2.6 %
Weighted average expected volatility
50 %
49 %
44 %
Weighted average expected life (in years)
4.52
3.13
3.08
Dividend yield
—
—
—
The Company considers an estimated forfeiture rate for stock options based on historical experience and the anticipated
forfeiture rates during the future contract life.
Goodwill and Other Identifiable Intangible Assets: Finite-lived intangible assets are amortized over their respective estimated
useful lives and evaluated for impairment periodically whenever events or changes in circumstances indicate that their related
carrying values may not be fully recoverable. Goodwill is assessed for impairment at least annually. The Company generally
performs its annual goodwill impairment analysis using a quantitative approach. The quantitative goodwill impairment test
identifies the existence of potential impairment by comparing the fair value of our single reporting unit with its carrying value,
including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit’s goodwill is considered
not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an
amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill present in our single
reporting unit. These estimates and assumptions could have a significant impact on whether or not an impairment charge is
recognized and the amount of any such charge. The Company performs its annual impairment assessment of goodwill during
the fourth quarter of each fiscal year. The Company determined that there was no impairment during the years ended June 30,
2021, 2020 and 2019.
Intangible Assets: Intangible assets consist of (i) acquired customer relationships, (ii) permit costs related to the Company’s
treatment facilities and transfer stations, (iii) patents and (iv) defense costs related to certain existing patents.
Cash: The Company maintains funds in bank accounts that, at times, may exceed the limit insured by the Federal Deposit
Insurance Corporation (“FDIC”). The risk of loss attributable to these uninsured balances is mitigated by depositing funds only
in high credit quality financial institutions. The Company has not 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 the average cost method. The Company periodically reviews the value and classification of items in
inventory and provides write-downs or write-offs of inventory based on its assessment of physical deterioration, obsolescence,
changes in price levels and other causes. Write-offs totaled $0.1 million or less for each of the fiscal years ended June 30, 2021,
2020 and 2019. The components of inventory are as follows (in thousands):
As of June 30,
2021
2020
Raw materials
$
2,040
$
1,402
Finished goods
5,063
5,300
Total inventory
7,103
6,702
Less: current portion
6,114
5,638
Inventory, net of current portion
$
989
$
1,064
The current portion of inventory includes amounts which the Company expects to sell in the next twelve month period based on
historical sales.
Property, Plant and Equipment and Financing Lease ROU Assets: Property, plant and equipment, including third party software
and implementation costs, is stated at cost, or fair value if acquired in a business combination or financing lease ROU assets,
less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of
the assets or the term of the lease. Additions, improvements and renewals significantly adding to the asset value or extending
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-12
the life of the asset are capitalized. Ordinary maintenance and repairs, which do not extend the physical or economic life of the
property or equipment, are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the results of
operations for the period.
Computer and software development costs, which include costs of computer software developed or obtained for internal use, all
programming, implementation and costs incurred with developing internal-use software, are capitalized during the development
project stage. External direct costs of materials and services consumed in developing or obtaining internal-use computer
software are capitalized.
The Company expenses costs associated with developing or obtaining internal-use software during the preliminary project
stage. Training and maintenance costs associated with system changes or internal-use software are expensed as incurred.
Additionally, the costs of data cleansing, reconciliation, balancing of old data to the new system, creation of new/additional data
and data conversion costs are expensed as incurred.
Impairment of Long-lived Assets: The Company evaluates the recoverability of property, plant and equipment and intangible or
other assets if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if a
write-down to fair value is necessary. No impairment loss was recognized during the years ended June 30, 2021, 2020 and
2019.
Accrued Liabilities: The components of Accrued Liabilities on the balance sheet as of June 30, 2021 and 2020 are as follows:
As of June 30,
2021
2020 (1)
Accrued compensation
$
1,399 $
767
Customer-related payables
1,214
1,108
Vendor-related payables
836
388
Other
491
505
Total
$
3,940 $
2,768
(1) Certain prior year amounts have been reclassified to conform to current year presentation.
Shipping and Handling Fees and Costs: The Company records amounts billed to customers for shipping and handling as
revenue. Costs incurred by the Company for shipping and handling have been classified as cost of revenues.
Advertising Costs: Advertising costs are charged to expenses when incurred and totaled $0.9 million for each of the fiscal years
ended June 30, 2021, 2020 and 2019.
Research and Development Costs: Research and development costs are charged to expense when incurred. Research activities
represent an important part of the Company’s business and include both internal labor costs and payments to third parties
related to the processes of discovering, testing and developing new products, improving existing products, as well as
demonstrating product efficacy and regulatory compliance prior to launch of new products and services. Research and
development expenses paid the third parties totaled less than $0.1 million for each of the fiscal years ended June 30, 2021, 2020
and 2019.
Employee Benefit Plans: In addition to group health-related benefits, the Company maintains a 401(k) employee savings plan
available to all full-time employees. The Company matches a portion of employee contributions with cash (25% of employee
contribution up to 6%). Company contributions to the 401(k) plan were less than $0.1 million in each of the fiscal years ended
June 30, 2021, 2020 and 2019, respectively and are included in selling, general and administrative expenses. For purposes of
the group health benefit plan, the Company self-insures an amount equal to the excess of the employees’ deductible (range from
$2,500 for each individual and family member covered) up to the amount by which the third-party insurance coverage begins
(ranges from $2,500 for individual up to $10,000 for family coverage). The amount of liability at June 30, 2021 and 2020 was
less than $0.1 million and is included in accrued liabilities. The Company also has an incentive plan for executives of the
Company, which provides for performance based cash and stock-based compensation awards. There was $0.6 million
recognized during the year ended June 30, 2021 for the incentive plan; no expense was recognized during the years 2020 and
2019 for cash awards pursuant to the plan.
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-13
Net Income (Loss) Per Share: Basic earnings per share excludes dilution and is determined by dividing net income (loss) by the
weighted average number of common shares outstanding including participating securities during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or
converted into common stock.
Fair Value of Financial Instruments: The Company considers the fair value of all financial instruments, including cash, accounts
receivable and accounts payable to approximate their carrying values at year-end due to their short-term nature. The carrying
value of the Company’s debt approximates fair value due to the market rates of interest. The fair value of the Company's
interest rate swap related to a portion of its long-term debt is included in other long-term and short-term liabilities in the amount
of $0.1 million as of June 30, 2021 and 2020.
Fair Value Measurements: The Company employs a hierarchy which prioritizes the inputs used to measure recurring fair value
into three distinct categories based on the lowest level of input that is significant to the fair value measurement. The
methodology for categorizing assets and liabilities that are measured at fair value pursuant to this hierarchy gives the highest
priority to unadjusted quoted prices in active markets and the lowest levels to unobservable inputs, summarized as follows:
•
Level 1 – Quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or
liabilities).
•
Level 3 – Significant unobservable inputs (including our own assumptions in determining fair value).
We use the cost, income or market valuation approaches to estimate the fair value of our assets and liabilities when insufficient
market-observable data is available to support our valuation assumptions. We determine the fair value of our interest rate swap
executed during the year ended June 30, 2020 using third-party pricing information that is derived from observable market
inputs, which we classify as level 2 with respect to the fair value hierarchy.
Segment Reporting: The Company operates in a single segment, focusing on developing cost-effective management solutions
for medical waste and unused dispensed medications generated by small and medium quantity generators.
Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expense during the reporting period. The Company uses estimates to determine many reported
amounts, including but not limited to allowance for doubtful accounts, recoverability of long-lived assets and intangibles, useful
lives used in depreciation and amortization, income taxes and valuation allowances, stock-based compensation, fair values of
assets and liabilities acquired in business combinations, selling price used in multiple-deliverable arrangements and return rates
used to estimate the percentage of container systems sold that will not be returned. Actual results could differ from these
estimates.
Business Combinations: The Company includes the results of operations of the businesses that are acquired as of the respective
dates of acquisition. The Company allocates the fair value of the purchase price of acquisitions to the assets acquired and
liabilities assumed based on their estimated fair values. The Company 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 is
recorded as goodwill.
Deferred Offering Costs: The Company capitalizes certain legal, accounting and other third-party fees that are directly
associated with an offering as deferred offering costs in Other Assets (long-term) in the Consolidated Balance Sheets until such
financings are consummated. These deferred costs will be reclassified to stockholders' equity or debt in the event the Company
completes a debt or equity offering.
Recently Issued Accounting Standards:
In March 2020, guidance for applying optional expedients and exceptions to ease the potential burden in accounting for
reference rate reform on financial reporting was issued. It is elective and applies to all entities, subject to meeting certain
criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate
expected to be discontinued because of reference rate reform on financial reporting. The provisions of the new guidance are
effective for interim periods beginning as of March 12, 2020 through December 31, 2022. There has been no material impact on
the Company's consolidated financial statements and related disclosures from the modification of its arrangements as of June
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-14
30, 2021. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations
which may impact the Company.
In June 2016, guidance for credit losses of financial instruments was issued, which requires entities to measure credit losses for
financial assets measured at amortized cost based on expected losses rather than incurred losses. The provisions of the new
guidance are effective for annual periods beginning after December 15, 2022 (effective July 1, 2023 for the Company),
including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of
evaluating the impact of the new guidance on its consolidated financial statements and related disclosures as well as evaluating
the available transition methods. The Company will continue to evaluate the standard as well as additional changes,
modifications or interpretations which may impact the Company.
Reclassification of Prior Year Presentation in the Consolidated Balance Sheets: Certain prior year amounts have been
reclassified for consistency with the current year presentation in the Consolidated Balance Sheets. The change in classification
does not affect previously reported total current assets, total assets, total current liabilities, total liabilities or total stockholders'
equity in the Consolidated Balance Sheets.
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
At June 30, 2021 and 2020, property, plant and equipment consisted of the following (in thousands):
June 30,
Useful Life
2021
2020
Furniture and fixtures
3 to 5 years
$
248 $
245
Plant and equipment
3 to 17 years
11,305
9,053
Manufacturing
15 years
169
169
Computers and software
3 to 5 years
2,435
2,132
Leasehold improvements
Life of Lease
6,652
3,192
Land
97
19
Building
40 years
938
—
Construction-in-progress
296
3,507
22,140
18,317
Less: accumulated depreciation
10,390
9,190
Less: financing lease ROU asset, net (1)
907
387
Net property, plant and equipment
$
10,843 $
8,740
(1) Financing lease ROU assets in the net amount of $0.9 million and $0.4 million as of June 30, 2021 and 2020, respectively,
are incorporated with leasehold improvements. Accumulated depreciation related to financing lease assets was $0.1 million
and less than $0.1 million as of June 30, 2021 and 2020, respectively.
Total depreciation expense in the fiscal years ended June 30, 2021, 2020 and 2019 was $1.4 million, $1.0 million and
$1.1 million, respectively. Depreciation expense included in cost of revenues was $1.1 million for the fiscal year ended 2021,
and $0.8 million for each of the fiscal years ended 2020 and 2019.
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-15
NOTE 4 – INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
Year ended June 30,
2021
2020
2019
Current:
Federal
$
— $
(122) $
(123)
State
375
35
42
Total current
$
375 $
(87) $
(81)
Deferred:
Federal
$
1,205 $
(1,406) $
217
State
(110)
(89)
34
Total deferred
1,095
(1,495)
251
Net income tax expense (benefit)
$
1,470 $
(1,582) $
170
The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended
June 30, 2021, 2020 and 2019 is as follows:
Year Ended June 30,
2021
2020
2019
Statutory rate
21.0 %
21.0 %
21.0 %
State income taxes, net
1.4 %
(1.0) %
22.9 %
Non-deductible expenses
0.2 %
1.6 %
2.7 %
Stock-based compensation
(10.5) %
0.7 %
16.1 %
Non-deductible compensation
2.7 %
— %
— %
PPP loan
(3.2) %
— %
— %
Research and development credits
(1.3) %
(5.3) %
7.3 %
Other
— %
(1.5) %
1.5 %
Effective rate before valuation allowance
10.3 %
15.5 %
71.5 %
Change in valuation allowance
— %
(247.1) %
(27.2) %
Effective tax rate
10.3 %
(231.6) %
44.3 %
The Company has historically recorded a valuation allowance to reduce its deferred tax assets to an amount that is more likely
than not to be realized. However, as of the year ended June 30, 2020, the Company released the full amount of the valuation
allowance against its deferred tax assets on the basis of the Company's reassessment of the recoverability of its deferred tax
assets.
At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future
realization of deferred tax assets. As of the years ended June 30, 2021 and June 30, 2020, the Company had a cumulative
positive amount of pretax income over a period of three years. The Company expects to utilize all U.S. federal and state net
operating loss carryforward balances and all remaining research and development credits.
At June 30, 2021 and 2020, the significant components of deferred tax assets and liabilities are as follows (in thousands):
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-16
June 30,
2021
2020
Deferred tax assets relating to:
Stock-based compensation
$
85 $
211
Research and development credits
717
490
Inventory
68
98
Professional fees
193
175
Deferred tax assets related to other items
251
140
Net operating loss carryforwards
142
1,016
Total deferred tax assets
1,456
2,130
Deferred tax liabilities related to depreciable and amortizable assets
(1,278)
(836)
Deferred tax liabilities related to other items
(21)
(42)
Net deferred tax asset
$
157 $
1,252
At June 30, 2021, the Company had net operating loss carryforwards of $0.7 million, which will expire, if unused, between
June 30, 2037 and June 30, 2038. At June 30, 2021, the Company had various tax credit carryforwards of $0.7 million which
will expire beginning on June 30, 2030.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was enacted in response to the
COVID-19 pandemic. The CARES Act, among other things, accelerated the Company's ability to recover refundable AMT
credits to 2018 and 2019. As such, the Company recorded the remaining balance of its AMT credits as a current income tax
receivable at June 30, 2020. The Company received $0.3 million and $0.2 million of refundable AMT credits in the years ended
June 30, 2021 and 2020, respectively.
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
On March 29, 2017, the Company entered into to a credit agreement with a commercial bank which was subsequently amended
on June 29, 2018 and on December 28, 2020 (the "Credit Agreement"). The Credit Agreement, which expires on December 28,
2023, provides for a $14 million committed credit facility that can be increased to $18 million upon the Company's request. The
proceeds of the Credit Agreement may be utilized as follows: (i) $6 million for working capital, letters of credit (up to
$2.0 million) and general corporate purposes, (ii) $8 million for acquisitions and (iii) an additional $4 million for working
capital, upon the Company's request. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s
assets with advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base
(as defined in the Credit Agreement) equal to 80% of eligible accounts receivable 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 to 75% 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) one-half 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 the Company’s cash flow leverage ratio. The interest rate as of June 30, 2021 was approximately
3.0%. The Company pays a fee of 0.25% per annum on the unused amount of the credit facility.
On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master
Equipment Finance Agreement with its existing commercial bank (collectively, the “Loan Agreement”). The Loan Agreement
provides for a five-year, $3.2 million facility, the proceeds of which are to be utilized for expenditures to facilitate future
growth at the Company’s treatment facility in Carthage, Texas (the “Texas Treatment Facility”) as follows: (i) $2.0 million for
planned improvements and (ii) $1.2 million for equipment. Indebtedness under the Loan Agreement is secured by the
Company’s real estate investment and equipment at the Texas Treatment Facility. Advances under the Loan Agreement mature
five years from the Closing Date (August 21, 2019) with monthly payments beginning in the month after the advancing period
ends. The advancing period extended through January 15, 2021 and August 2020 for the real estate portion and the equipment
portion of the Loan Agreement, respectively. Borrowings during the advancing period for the real estate portion and for the
entire term of the equipment portion of the Loan Agreement bear interest computed at the One Month ICE LIBOR, plus two-
hundred and fifty (250) basis points which was a rate of 2.73% on June 30, 2021. The Company 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 at 4.15%.
On January 22, 2021, certain wholly owned subsidiaries of the Company entered into a real estate term loan agreement (the
"Real Estate Loan Agreement" and together with the Credit Agreement and the Loan Agreement, the "Credit and Loan
Agreements") with the Company's existing commercial bank. The Real Estate Loan Agreement provides for a five-year,
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-17
$0.9 million facility, the proceeds of which have been utilized to purchase the property in Pennsylvania which had previously
been leased by the Company for its operations. The Real Estate Loan Agreement matures five-years from January 22, 2021
with monthly payments based on a 20-year amortization and bears interest at 4%.
On April 20, 2020, the Company received loan proceeds of $2.2 million under the Paycheck Protection Program (“PPP”) under
a promissory note from its existing commercial bank (the “PPP Loan”). The PPP, established as part of the CARES Act,
provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying
business. The loans and accrued interest may be forgivable after eight to twenty-four weeks providing that the borrower uses
the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.
On June 15, 2021, the Company received a notification from its existing commercial bank that the Small Business
Administration ("SBA") fully approved the Company's PPP Loan forgiveness request and that the PPP Loan, reflected in the
Company’s balance sheet as Long-Term Debt, was forgiven. The Company recognized the gain on forgiveness of PPP loan in
the financial statements during the fourth quarter of the year ending June 30, 2021. Although the PPP Loan has been forgiven,
records are to be maintained for at least six years following the date of forgiveness as the SBA may still audit the eligibility of
the Company's receipt of the PPP Loan proceeds. To the extent the eligibility is challenged, the Company may have to repay all
or part of the PPP Loan.
At June 30, 2021 and 2020, long-term debt consisted of the following (in thousands):
June 30,
2021
2020
Acquisition loan, monthly payments of $43; maturing March 2022.
$
431 $
948
Equipment loan, monthly payments of $17; maturing August 2024, net of debt issuance costs
of $40
830
929
Real estate loans, monthly payments of $9; maturing August 2024 and January 2026
2,803
1,103
Paycheck Protection Program loan
—
2,183
Total long-term debt
4,064
5,163
Less: current portion
735
1,658
Long-term debt, net of current portion
$
3,329 $
3,505
The Company has availability under the Credit Agreement of $13.9 million ($5.9 million for the working capital portion and
$8.0 million for the acquisitions) as of June 30, 2021 with the option to extend the availability up to $17.9 million. The
Company also has $0.1 million in letters of credit outstanding as of June 30, 2021.
The Credit and Loan Agreements contain affirmative and negative covenants that, among other things, require the Company to
maintain a maximum cash flow leverage ratio of no more than 3.0 to 1.0 and a minimum debt service coverage ratio of not less
than 1.15 to 1.00. The Credit and Loan Agreements also contain customary events of default which, if uncured, may terminate
the agreements and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the
amount available under the Credit Agreement. The Company was in compliance with all the financial covenants under the
Credit and Loan Agreements as of June 30, 2021.
Payments due on long-term debt subsequent to June 30, 2021 are as follows (in thousands):
Twelve Months Ending June 30,
2022
$
735
2023
316
2024
316
2025
2,041
2026
696
$
4,104
NOTE 6 - EQUITY TRANSACTIONS
During the years ended June 30, 2021, 2020 and 2019, stock options to purchase shares of the Company's common stock were
exercised as follows (in thousands except per share amounts):
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-18
Year ended June 30,
2021
2020
2019
Options exercised
712
154
—
Proceeds
$
3,164 $
668 $
—
Average exercise price per share
$
4.44 $
4.32 $
—
NOTE 7 - STOCK BASED COMPENSATION
The Company sponsors the Sharps Compliance Corp. 2010 Stock Plan (the “2010 Plan”) covering employees, consultants and
non-employee directors. The 2010 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 common stock of which 354,621 options and restricted shares are
outstanding as of June 30, 2021. Options granted generally vest over a period of four years and expire seven years after the date
of grant. Restricted stock generally vests over one year. As of June 30, 2021, there were 956,089 shares available for grant
under the 2010 Plan.
The summary of activity for all restricted stock during the fiscal years ended June 30, 2021, 2020 and 2019 is presented in the
table below (in thousands):
Year ended June 30,
2021
2020
2019
Unvested at beginning of the year
22
13
13
Granted
75
80
63
Vested
(83)
(71)
(55)
Forfeited
—
—
(8)
Unvested at end of the year
14
22
13
The weighted average fair value per share of restricted stock granted during the fiscal years ended June 30, 2021, 2020 and
2019 was $7.53, $4.31 and $3.53, respectively. The weighted average fair value per share of restricted stock which vested
during the fiscal years ended June 30, 2021, 2020 and 2019 was $6.74, $4.12 and $3.69, respectively.
The summary of activity for all stock options during the fiscal years ended June 30, 2021, 2020 and 2019 is presented in the
table below (in thousands except per share amounts):
Options
Outstanding
Weighted
Average
Exercise
Price
Options Outstanding at June 30, 2018
920 $
4.57
Granted
578 $
3.73
Forfeited or canceled
(218) $
4.16
Options Outstanding at June 30, 2019
1,280 $
4.26
Granted
82
$
6.74
Exercised
(154) $
4.32
Forfeited or canceled
(63) $
3.95
Options Outstanding at June 30, 2020
1,145 $
4.45
Granted
27 $
7.57
Exercised
(712) $
4.44
Forfeited or canceled
(119) $
6.61
Options Outstanding at June 30, 2021
341 $
3.96
Options Exercisable at June 30, 2021
33 $
4.85
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-19
The following table summarizes information about stock options outstanding as of June 30, 2021 (in thousands except per share
amounts):
Options Outstanding
Range of Exercise
Price
Outstanding as
of
June 30, 2021
Weighted
Average
Remaining
Life
(in Years)
Weighted
Average
Exercise
Price
$2.51 - $3.75
35
4.42
$
3.26
$3.76 - $5.00
294
4.38
$
3.93
$5.01 - $7.50
12
1.81
$
6.68
341
$
3.96
The following table summarizes information about stock options exercisable as of June 30, 2021 (in thousands except per share
amounts):
Options Exercisable
Range of Exercise
Price
Exercisable as
of
June 30, 2021
Weighted
Average
Remaining
Life
(in Years)
Weighted
Average
Exercise
Price
$2.51 - $3.75
10
4.42
$
3.26
$3.76 - $5.00
13
1.92
$
4.56
$5.01 - $7.50
10
1.15
$
6.75
33
$
4.85
As of June 30, 2021, there was $0.3 million of stock option and restricted stock compensation expense related to non-vested
awards. This expense is expected to be recognized over a weighted average period of 1.54 years.
NOTE 8 - LEASES
During the twelve months ended June 30, 2021, lease cost amounts, which reflect the fixed rent expense associated with
operating and financing leases, are as follows (in thousands):
Year Ended June 30,
2021
2020
Lease cost (1) - fixed rent expense:
Operating lease cost included in:
Cost of revenues
$
2,448 $
1,851
Selling, general and administrative
452
451
Financing lease cost included in:
Cost of revenues (amortization expense)
91
26
Interest expense
18
4
Total
$
3,009 $
2,332
(1) Short-term lease cost and variable lease cost were not significant during the period.
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-20
During the twelve months ended June 30, 2021, the Company had the following cash and non-cash activities associated with
leases (in thousands):
Year Ended June 30,
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow for operating leases
$
2,844 $
2,274
Non-cash changes to the Operating ROU Asset and Operating Lease Liability
Reduction to ROU asset due to acquisition of previously leased asset
$
(904) $
—
Additions and modifications to ROU asset obtained from new operating lease
liabilities
$
2,994 $
6,214
Additions to ROU asset obtained from operating lease liabilities upon adoption of
new guidance
$
— $
4,591
Additions to ROU asset obtained from new financing lease liabilities
$
598 $
387
As of June 30, 2021, the weighted average remaining lease term for all operating and financing leases is 3.92 years and 5.42
years. The weighted average discount rate associated with operating and financing leases as of June 30, 2021 is 4% and 3%,
respectively.
The future payments due under leases as of June 30, 2021 is as follows (in thousands):
Future payments due in the year ended June 30,
Operating leases
Financing leases
2022
$
2,703 $
186
2023
2,267
183
2024
2,066
182
2025
1,643
178
2026
614
162
Thereafter
124
89
Total undiscounted lease payments
9,417
980
Less effects of discounting
(931)
(79)
Lease liability recognized
$
8,486 $
901
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Performance bonds: The Company utilizes performance bonds to support operations based on certain state requirements. At
June 30, 2021, the Company had performance bonds outstanding covering financial assurance up to $1.3 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, the outcome of such matters is not anticipated to have a material adverse effect on the Company’s
consolidated financial position or consolidated results of operations.
NOTE 10 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common
shares after considering the additional dilution related to common stock options and restricted stock. In computing diluted
earnings per share, the outstanding common stock options are considered dilutive using the treasury stock method.
Table of Contents
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-21
The Company’s restricted stock awards are treated as outstanding for earnings per share calculations since these shares have
full voting rights and are entitled to participate in dividends declared on common shares, if any, and undistributed earnings. As
participating securities, the shares of restricted stock are included in the calculation of basic and diluted EPS using the two-class
method. For the periods presented, the amount of earnings allocated to the participating securities was not material.
The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per share
amounts):
Year Ended June 30,
2021
2020
2019
Net income as reported
$
12,868 $
2,266 $
214
Weighted average common shares outstanding
16,593
16,249
16,116
Effect of dilutive stock options
435
182
7
Weighted average diluted common shares outstanding
17,028
16,431
16,123
Net income per common share
Basic
$
0.78 $
0.14 $
0.01
Diluted
$
0.76 $
0.14 $
0.01
Employee stock options excluded from computation of diluted income per
share amounts because their effect would be anti-dilutive
—
206
1,173
NOTE 11 – GOODWILL AND INTANGIBLE ASSETS
At June 30, 2021 and 2020, intangible assets consisted of the following (in thousands):
June 30,
2021
2020
Estimated
Useful Lives
Original
Amount
Accumulated
Amortization
Net
Amount
Original
Amount
Accumulated
Amortization
Net
Amount
Customer
relationships
7 years
$
3,007 $
(2,207) $
800 $
3,007 $
(1,780) $
1,227
Permits
6 - 15 years
1,974
(705)
1,269
1,892
(596)
1,296
Patents
5 - 17 years
420
(327)
93
420
(311)
109
Tradename
7 years
270
(193)
77
270
(154)
116
Non-compete
5 years
117
(117)
—
117
(94)
23
Total intangible
assets, net
$
5,788 $
(3,549) $
2,239 $
5,706 $
(2,935) $
2,771
Amortization expense was $0.6 million for the fiscal year ended June 30, 2021, and $0.6 million for each of the fiscal years
ended 2020 and 2019.
As of June 30, 2021, future amortization of intangible assets is as follows (in thousands):
Year Ended June 30,
2022
$
624
2023
570
2024
159
2025
158
2026
158
Thereafter
570
$
2,239
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SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021, 2020 and 2019
F-22