UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ~~March~~December 31, 2021

☐ 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			(I.R.S. Employer Identification No.)
incorporation or organization)


9220 Kirby Drive, Suite 500, Houston, Texas			77054
(Address of principal executive offices)			(Zip Code)

(713) 432-0300

(Registrant’s telephone number, including area code)

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

Indicate by check mark if 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

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 Securities Exchange Act of 1934.


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 is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐ No ☒

As of ~~May 3, 2021,~~January 31, 2022, there were ~~16,890,526~~19,247,243 outstanding shares of the Registrant's common stock, par value $0.01 per share.


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES


PART I	FINANCIAL INFORMATION	PAGE

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of ~~March~~December ~~31, 202~~3 1 , 2021 and June 30, ~~2020~~2021	4

	Condensed Consolidated Statements of Operations for the three months ended ~~March~~Decem ~~31, 202~~ber 3 1 , 2021 and 2 ~~020~~2020	5

	Condensed Consolidated Statements of Operations for the ~~nine~~six months ended ~~March~~December 31, ~~202~~1 2021 and 2 02 02020	6

	Condensed Consolidated Statements of Stockholders’ Equity for the three and ~~nine~~six months ended ~~March~~De cem ber 3 1 , ~~202~~1 2021 and 20 202020	7

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~March~~D ~~31, 202~~ecem ber 3 1 , 2021 and 20 202020	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 4.	Controls and Procedures	26

Part II	OTHER INFORMATION	2726

Item 1.	Legal Proceedings	2726

Item 1A.	Risk Factors	2726

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	2726

Item 6.	Exhibits	27

	SIGNATURES	2827

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and par value amounts)


		March 31,		June 30,			December 31,		June 30,
		2021		2020			2021		2021
ASSETS	ASSETS					ASSETS
CURRENT ASSETS	CURRENT ASSETS					CURRENT ASSETS
Cash	Cash	$	11,216	$	5,416	Cash	$	36,001	$	27,767
Accounts receivable, net	Accounts receivable, net	23,415		11,789		Accounts receivable, net	13,047		9,738
Inventory	Inventory	4,378		5,638		Inventory	6,821		6,114
Contract asset	Contract asset	37		156		Contract asset	18		20
Prepaid and other current assets	Prepaid and other current assets	446		1,287		Prepaid and other current assets	1,857		1,459
TOTAL CURRENT ASSETS	TOTAL CURRENT ASSETS	39,492		24,286		TOTAL CURRENT ASSETS	57,744		45,098
PROPERTY, PLANT AND EQUIPMENT, net	PROPERTY, PLANT AND EQUIPMENT, net	10,952		8,740		PROPERTY, PLANT AND EQUIPMENT, net	11,155		10,843
OPERATING LEASE RIGHT OF USE ASSET	OPERATING LEASE RIGHT OF USE ASSET	8,407		8,747		OPERATING LEASE RIGHT OF USE ASSET	9,073		8,353
FINANCING LEASE RIGHT OF USE ASSET, net	FINANCING LEASE RIGHT OF USE ASSET, net	647		387		FINANCING LEASE RIGHT OF USE ASSET, net	980		907
INVENTORY, net of current portion	INVENTORY, net of current portion	988		1,064		INVENTORY, net of current portion	957		989
OTHER ASSETS	OTHER ASSETS	110		154		OTHER ASSETS	154		110
GOODWILL	GOODWILL	6,735		6,735		GOODWILL	7,996		6,735
INTANGIBLE ASSETS, net	INTANGIBLE ASSETS, net	2,390		2,771		INTANGIBLE ASSETS, net	2,772		2,239
DEFERRED TAX ASSET		0		1,252
DEFERRED TAX ASSET, net						DEFERRED TAX ASSET, net	—		157
TOTAL ASSETS	TOTAL ASSETS	$	69,721	$	54,136	TOTAL ASSETS	$	90,831	$	75,431
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES	CURRENT LIABILITIES					CURRENT LIABILITIES
Accounts payable	Accounts payable	$	3,550	$	3,291	Accounts payable	$	3,592	$	2,922
Accrued liabilities	Accrued liabilities	3,044		2,768		Accrued liabilities	3,208		3,940
Operating lease liability	Operating lease liability	2,398		2,192		Operating lease liability	2,457		2,368
Financing lease liability	Financing lease liability	115		65		Financing lease liability	189		160
Current maturities of long-term debt	Current maturities of long-term debt	2,836		1,658		Current maturities of long-term debt	480		735
Contract liability	Contract liability	6,877		3,262		Contract liability	5,062		7,028
TOTAL CURRENT LIABILITIES	TOTAL CURRENT LIABILITIES	18,820		13,236		TOTAL CURRENT LIABILITIES	14,988		17,153
CONTRACT LIABILITY, net of current portion	CONTRACT LIABILITY, net of current portion	1,692		705		CONTRACT LIABILITY, net of current portion	408		1,461
OPERATING LEASE LIABILITY, net of current portion	OPERATING LEASE LIABILITY, net of current portion	6,150		6,671		OPERATING LEASE LIABILITY, net of current portion	6,752		6,118
FINANCING LEASE LIABILITY, net of current portion	FINANCING LEASE LIABILITY, net of current portion	537		337		FINANCING LEASE LIABILITY, net of current portion	804		741
OTHER LIABILITIES	OTHER LIABILITIES	54		104		OTHER LIABILITIES	23		45
DEFERRED TAX LIABILITY		32		0
DEFERRED TAX LIABILITY, net						DEFERRED TAX LIABILITY, net	53		—
LONG-TERM DEBT, net of current portion	LONG-TERM DEBT, net of current portion	3,616		3,505		LONG-TERM DEBT, net of current portion	3,172		3,329
TOTAL LIABILITIES	TOTAL LIABILITIES	30,901		24,558		TOTAL LIABILITIES	26,200		28,847
COMMITMENTS AND CONTINGENCIES	COMMITMENTS AND CONTINGENCIES	0		0		COMMITMENTS AND CONTINGENCIES	0		0
STOCKHOLDERS' EQUITY	STOCKHOLDERS' EQUITY					STOCKHOLDERS' EQUITY
Common stock, $0.01 par value per share; 40,000,000 shares authorized; 16,882,033 and 16,667,572 shares issued, respectively and 16,586,418 and 16,371,957 shares outstanding, respectively		171		168
Common stock, $0.01 par value per share; 40,000,000 shares authorized; 19,542,858 and 17,454,859 shares issued, respectively and 19,247,243 and 17,159,244 shares outstanding, respectively						Common stock, $0.01 par value per share; 40,000,000 shares authorized; 19,542,858 and 17,454,859 shares issued, respectively and 19,247,243 and 17,159,244 shares outstanding, respectively	197		176
Treasury stock, at cost, 295,615 shares repurchased	Treasury stock, at cost, 295,615 shares repurchased	(1,554)		(1,554)		Treasury stock, at cost, 295,615 shares repurchased	(1,554)		(1,554)
Additional paid-in capital	Additional paid-in capital	31,657		30,203		Additional paid-in capital	51,712		34,333
Retained earnings	Retained earnings	8,546		761		Retained earnings	14,276		13,629
TOTAL STOCKHOLDERS' EQUITY	TOTAL STOCKHOLDERS' EQUITY	38,820		29,578		TOTAL STOCKHOLDERS' EQUITY	64,631		46,584
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	69,721	$	54,136	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	90,831	$	75,431

The accompanying notes are an integral part of these condensed consolidated financial statements.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per-share data)


		Three-Months Ended March 31,					Three-Months Ended December 31,
		2021		2020			2021		2020
REVENUES	REVENUES	$	27,528	$	10,414	REVENUES	$	18,878	$	17,011
Cost of revenues	Cost of revenues	14,129		8,191		Cost of revenues	12,271		11,374
GROSS PROFIT	GROSS PROFIT	13,399		2,223		GROSS PROFIT	6,607		5,637
Selling, general and administrative	Selling, general and administrative	4,181		3,600		Selling, general and administrative	4,388		3,756
Depreciation and amortization	Depreciation and amortization	216		201		Depreciation and amortization	236		205
OPERATING INCOME (LOSS)		9,002		(1,578)
OPERATING INCOME						OPERATING INCOME	1,983		1,676
OTHER INCOME (EXPENSE)	OTHER INCOME (EXPENSE)					OTHER INCOME (EXPENSE)
Interest income	Interest income	0		4		Interest income	14		—
Interest expense	Interest expense	(55)		(36)		Interest expense	(58)		(47)
Income associated with derivative instrument	Income associated with derivative instrument	26		0		Income associated with derivative instrument	27		10
TOTAL OTHER EXPENSE	TOTAL OTHER EXPENSE	(29)		(32)		TOTAL OTHER EXPENSE	(17)		(37)
INCOME (LOSS) BEFORE INCOME TAXES		8,973		(1,610)
INCOME TAX EXPENSE (BENEFIT)
INCOME BEFORE INCOME TAXES						INCOME BEFORE INCOME TAXES	1,966		1,639
INCOME TAX EXPENSE						INCOME TAX EXPENSE
Current	Current	1,083		(176)		Current	63		64
Deferred	Deferred	1,040		122		Deferred	466		347
TOTAL INCOME TAX EXPENSE (BENEFIT)		2,123		(54)
NET INCOME (LOSS)		$	6,850	$	(1,556)
NET INCOME (LOSS) PER COMMON SHARE
Basic		$	0.41	$	(0.10)
Diluted		$	0.40	$	(0.10)
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE:
TOTAL INCOME TAX EXPENSE						TOTAL INCOME TAX EXPENSE	529		411
NET INCOME						NET INCOME	$	1,437	$	1,228

NET INCOME PER COMMON SHARE - Basic and Diluted						NET INCOME PER COMMON SHARE - Basic and Diluted	$	0.07	$	0.07

WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:						WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:
Basic	Basic	16,556		16,264		Basic	19,245		16,497
Diluted	Diluted	17,187		16,264		Diluted	19,400		16,929

The accompanying notes are an integral part of these condensed consolidated financial statements.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per-share data)


		Nine-Months Ended March 31,					Six-Months Ended December 31,
		2021		2020			2021		2020

REVENUES	REVENUES	$	57,690	$	38,578	REVENUES	$	32,793	$	30,162
Cost of revenues	Cost of revenues	35,031		26,999		Cost of revenues	22,765		20,902
GROSS PROFIT	GROSS PROFIT	22,659		11,579		GROSS PROFIT	10,028		9,260
Selling, general and administrative	Selling, general and administrative	11,725		10,718		Selling, general and administrative	8,588		7,544
Depreciation and amortization	Depreciation and amortization	625		602		Depreciation and amortization	454		409
OPERATING INCOME	OPERATING INCOME	10,309		259		OPERATING INCOME	986		1,307
OTHER INCOME (EXPENSE)	OTHER INCOME (EXPENSE)					OTHER INCOME (EXPENSE)
Interest income	Interest income	0		13		Interest income	14		—
Interest expense	Interest expense	(134)		(81)		Interest expense	(114)		(79)
Income associated with derivative instrument	Income associated with derivative instrument	41		0		Income associated with derivative instrument	34		15
TOTAL OTHER EXPENSE	TOTAL OTHER EXPENSE	(93)		(68)		TOTAL OTHER EXPENSE	(66)		(64)
INCOME BEFORE INCOME TAXES	INCOME BEFORE INCOME TAXES	10,216		191		INCOME BEFORE INCOME TAXES	920		1,243
INCOME TAX EXPENSE (BENEFIT)
INCOME TAX EXPENSE						INCOME TAX EXPENSE
Current	Current	1,147		(120)		Current	63		64
Deferred	Deferred	1,284		211		Deferred	210		244
TOTAL INCOME TAX EXPENSE	TOTAL INCOME TAX EXPENSE	2,431		91		TOTAL INCOME TAX EXPENSE	273		308
NET INCOME	NET INCOME	$	7,785	$	100	NET INCOME	$	647	$	935
NET INCOME PER COMMON SHARE
Basic		$	0.47	$	0.01
Diluted		$	0.46	$	0.01

NET INCOME PER COMMON SHARE - Basic and Diluted						NET INCOME PER COMMON SHARE - Basic and Diluted	$	0.03	$	0.06

WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:	WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:					WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:
Basic	Basic	16,481		16,211		Basic	18,562		16,444
Diluted	Diluted	16,978		16,312		Diluted	18,656		16,875

The accompanying notes are an integral part of these condensed consolidated financial statements.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)


		Common Stock				Treasury Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity			Common Stock				Treasury Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity
		Shares		Amount		Shares	Amount									Shares		Amount		Shares	Amount
Balances, December 31, 2020			16,799,702	$	170	(295,615)	$	(1,554)	$	30,814	$	1,696	$	31,126
Balances, September 30, 2021															Balances, September 30, 2021		19,524,859	$	197	(295,615)	$	(1,554)	$	51,363	$	12,839	$	62,845

Stock-based compensation															Stock-based compensation		—	—		—	—		349		—		349
Issuance of restricted stock															Issuance of restricted stock		17,999	—		—	—		—		—		—
Net income															Net income		—	—		—	—		—		1,437		1,437
Balances, December 31, 2021															Balances, December 31, 2021		19,542,858	$	197	(295,615)	$	(1,554)	$	51,712	$	14,276	$	64,631

																Common Stock				Treasury Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity
																Shares		Amount		Shares	Amount
Balances, September 30, 2020															Balances, September 30, 2020		16,718,103	$	169	(295,615)	$	(1,554)	$	30,589	$	468	$	29,578
Exercise of stock options	Exercise of stock options		72,750	1		—	—		313		—		314		Exercise of stock options		18,000	—		—	—		86		—		86
Stock-based compensation	Stock-based compensation		—	—		—	—		530		—		530		Stock-based compensation		—	—		—	—		140		—		140
Issuance of restricted stock	Issuance of restricted stock		9,581	0		—	—		0		—		0		Issuance of restricted stock		63,599	1		—	—		(1)		—		—
Net income	Net income		—	—		—	—		—		6,850		6,850		Net income		—	—		—	—		—		1,228		1,228
Balances, March 31, 2021			16,882,033	$	171	(295,615)	$	(1,554)	$	31,657	$	8,546	$	38,820
Balances, December 31, 2020															Balances, December 31, 2020		16,799,702	$	170	(295,615)	$	(1,554)	$	30,814	$	1,696	$	31,126

		Common Stock				Treasury Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Total Stockholders' Equity			Common Stock				Treasury Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity
		Shares		Amount		Shares	Amount									Shares		Amount		Shares	Amount
Balances, December 31, 2019			16,524,478	$	166	(295,615)	$	(1,554)	$	29,302	$	151	$	28,065
Exercise of stock options			114,844	1		—	—		517		—		518
Balances, June 30, 2021															Balances, June 30, 2021		17,454,859	$	176	(295,615)	$	(1,554)	$	34,333	$	13,629	$	46,584
Issuance of common stock pursuant to secondary offering, net															Issuance of common stock pursuant to secondary offering, net		2,070,000	21		—	—		16,750		—		16,771
Stock-based compensation	Stock-based compensation		—	—		—	—		147		—		147		Stock-based compensation		—	—		—	—		629		—		629

Net loss			—	—		—	—		—		(1,556)		(1,556)
Balances, March 31, 2020			16,639,322	$	167	(295,615)	$	(1,554)	$	29,966	$	(1,405)	$	27,174
Issuance of restricted stock															Issuance of restricted stock		17,999	—		—	—		—		—		—
Net income															Net income		—	—		—	—		—		647		647
Balances, December 31, 2021															Balances, December 31, 2021		19,542,858	$	197	(295,615)	$	(1,554)	$	51,712	$	14,276	$	64,631

		Common Stock				Treasury Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity			Common Stock				Treasury Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity
		Shares		Amount		Shares	Amount									Shares		Amount		Shares	Amount
Balances, June 30, 2020	Balances, June 30, 2020		16,667,572	$	168	(295,615)	$	(1,554)	$	30,203	$	761	$	29,578	Balances, June 30, 2020		16,667,572	$	168	(295,615)	$	(1,554)	$	30,203	$	761	$	29,578
Exercise of stock options	Exercise of stock options		141,281	2		—	—		623		—		625		Exercise of stock options		68,531	1		—	—		310		—		311
Stock-based compensation	Stock-based compensation		—	—		—	—		832		—		832		Stock-based compensation		—	—		—	—		302		—		302
Issuance of restricted stock	Issuance of restricted stock		73,180	1		—	—		(1)		—		0		Issuance of restricted stock		63,599	1		—	—		(1)		—		—
Net income	Net income		—	—		—	—		—		7,785		7,785		Net income		—	—		—	—		—		935		935
Balances, March 31, 2021			16,882,033	$	171	(295,615)	$	(1,554)	$	31,657	$	8,546	$	38,820

		Common Stock				Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' Equity
		Shares		Amount		Shares	Amount
Balances, June 30, 2019			16,433,128	$	165	(295,615)	$	(1,554)	$	29,020	$	(1,505)	$	26,126
Exercise of stock options			134,194	1		—	—		575		—		576
Stock-based compensation			—	—		—	—		372		—		372
Issuance of restricted stock			72,000	1		—	—		(1)		—		0
Net income			—	—		—	—		—		100		100
Balances, March 31, 2020			16,639,322	$	167	(295,615)	$	(1,554)	$	29,966	$	(1,405)	$	27,174
Balances, December 31, 2020															Balances, December 31, 2020		16,799,702	$	170	(295,615)	$	(1,554)	$	30,814	$	1,696	$	31,126

The accompanying notes are an integral part of these condensed consolidated financial statements.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


		Nine-Months Ended March 31,					Six-Months Ended December 31,
		2021		2020			2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES	CASH FLOWS FROM OPERATING ACTIVITIES					CASH FLOWS FROM OPERATING ACTIVITIES
Net income	Net income	$	7,785	$	100	Net income	$	647	$	935
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:						Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization	1,445		1,191		Depreciation and amortization	1,166		923
Bad debt expense	Bad debt expense	141		91		Bad debt expense	44		100
Inventory write-off	Inventory write-off	76		13		Inventory write-off	1		24
Loss on disposal of property, plant and equipment	Loss on disposal of property, plant and equipment	1		6		Loss on disposal of property, plant and equipment	—		1
Stock-based compensation expense	Stock-based compensation expense	832		372		Stock-based compensation expense	629		302
Income on derivative instrument		(41)		0
Income associated with derivative instrument						Income associated with derivative instrument	(34)		(15)
Deferred tax expense	Deferred tax expense	1,284		211		Deferred tax expense	210		244
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	(11,767)		(367)		Accounts receivable	(3,288)		(1,597)
Inventory	Inventory	1,260		(1,034)		Inventory	(676)		355
Prepaid and other assets	Prepaid and other assets	885		(700)		Prepaid and other assets	(442)		488
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	846		692		Accounts payable and accrued liabilities	(251)		160
Contract asset and contract liability	Contract asset and contract liability	4,721		947		Contract asset and contract liability	(3,017)		1,050
NET CASH PROVIDED BY OPERATING ACTIVITIES		7,468		1,522
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES						NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	(5,011)		2,970
CASH FLOWS FROM INVESTING ACTIVITIES	CASH FLOWS FROM INVESTING ACTIVITIES					CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment	Purchase of property, plant and equipment	(2,566)		(2,500)		Purchase of property, plant and equipment	(761)		(2,023)
Proceeds from sale of property, plant and equipment		0		3
Payments for business acquisition, net of cash acquired						Payments for business acquisition, net of cash acquired	(2,181)		—
Additions to intangible assets	Additions to intangible assets	(79)		(121)		Additions to intangible assets	(74)		(62)
NET CASH USED IN INVESTING ACTIVITIES	NET CASH USED IN INVESTING ACTIVITIES	(2,645)		(2,618)		NET CASH USED IN INVESTING ACTIVITIES	(3,016)		(2,085)
CASH FLOWS FROM FINANCING ACTIVITIES	CASH FLOWS FROM FINANCING ACTIVITIES					CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options	Proceeds from exercise of stock options	625		576		Proceeds from exercise of stock options	—		311

Proceeds from issuance of common stock, net						Proceeds from issuance of common stock, net	16,771		—
Proceeds from long-term debt	Proceeds from long-term debt	961		1,343		Proceeds from long-term debt	—		961
Repayments of long-term debt	Repayments of long-term debt	(545)		(387)		Repayments of long-term debt	(412)		(347)
Payments on financing lease liabilities	Payments on financing lease liabilities	(64)		0		Payments on financing lease liabilities	(98)		—
Payments of debt issuance costs		0		(50)

NET CASH PROVIDED BY FINANCING ACTIVITIES	NET CASH PROVIDED BY FINANCING ACTIVITIES	977		1,482		NET CASH PROVIDED BY FINANCING ACTIVITIES	16,261		925
NET INCREASE IN CASH	NET INCREASE IN CASH	5,800		386		NET INCREASE IN CASH	8,234		1,810
CASH, beginning of period	CASH, beginning of period	5,416		4,512		CASH, beginning of period	27,767		5,416
CASH, end of period	CASH, end of period	$	11,216	$	4,898	CASH, end of period	$	36,001	$	7,226
SUPPLEMENTAL CASH FLOW DISCLOSURES:	SUPPLEMENTAL CASH FLOW DISCLOSURES:					SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid, net of refunds	Income taxes paid, net of refunds	$	(210)	$	90	Income taxes paid, net of refunds	$	177	$	(261)
Interest paid on long-term debt	Interest paid on long-term debt	$	120	$	32	Interest paid on long-term debt	$	116	$	80
NON-CASH INVESTING AND FINANCING ACTIVITIES:	NON-CASH INVESTING AND FINANCING ACTIVITIES:					NON-CASH INVESTING AND FINANCING ACTIVITIES:

Property, plant and equipment financed through accounts payable	Property, plant and equipment financed through accounts payable	$	(295)	$	46	Property, plant and equipment financed through accounts payable	$	(143)	$	(263)
Purchase of previously leased property, plant and equipment financed with note payable		$	873	$	0

The accompanying notes are an integral part of these condensed consolidated financial statements.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - ORGANIZATION AND BACKGROUND

Organization: The accompanying unaudited condensed 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, Citiwaste, LLC, ~~and~~ Sharps Properties, LLC and Affordable Medical Waste LLC (collectively, “Sharps” or the “Company”). 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 its route-based pick-up services in a thirty-seven (37) state region of the South, Southeast, Southwest, Midwest and Northeast portions of the United States.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and with instructions to Form 10-Q and, accordingly, do not include all information and footnotes required under generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. Additionally, the preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts. In the opinion of management, these interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of ~~March~~December 31, 2021, the results of its operations for the three and ~~nine~~six months ended ~~March~~December 31, 2021 and 2020, cash flows for the ~~nine~~six months ended ~~March~~December 31, 2021 and 2020, and stockholders’ equity for the three and ~~nine~~six months ended ~~March~~December 31, 2021 and 2020. The results of operations for the three and ~~nine~~six months ended ~~March~~December 31, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, ~~2021.~~2022. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, ~~2020. Certain amounts on the balance sheet as of June 30, 2020 have been reclassified to conform to current presentation.~~2021.

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.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3 - 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~~(in thousands):

Three-Months Ended March 31,
2021 % Total 2020 % Total
REVENUES BY SOLUTION:
Mailbacks $ 20,893 75.9 % $ 4,702 45.1 %
Route-based pickup services 3,597 13.1 % 2,625 25.2 %
Unused medications 2,078 7.5 % 2,111 20.3 %
Third party treatment services 76 0.3 % 38 0.4 %
Other (1)
884 3.2 % 938 9.0 %
Total revenues $ 27,528 100.0 % $ 10,414 100.0 %
Nine-Months Ended March 31,
2021 % Total 2020 % Total
REVENUES BY SOLUTION:
Mailbacks $ 37,507 64.9 % $ 20,383 52.8 %
Route-based pickup services 10,244 17.8 % 7,762 20.1 %
Unused medications 6,152 10.7 % 6,815 17.7 %
Third party treatment services 390 0.7 % 123 0.3 %
Other (1)
3,397 5.9 % 3,495 9.1 %
Total revenues $ 57,690 100.0 % $ 38,578 100.0 %


	Three-Months Ended December 31,
	2021		% Total		2020		% Total
REVENUES BY SOLUTION:
Mailbacks	$	12,070	63.9	%	$	10,452	61.4	%
Route-based pickup services	3,551		18.8	%	3,491		20.5	%
Unused medications	1,865		9.9	%	1,713		10.1	%
Third party treatment services	54		0.3	%	179		1.1	%
Other (1)	1,338		7.1	%	1,176		6.9	%
Total revenues	$	18,878	100.0	%	$	17,011	100.0	%

	Six-Months Ended December 31,
	2021		% Total		2020		% Total
REVENUES BY SOLUTION:
Mailbacks	$	18,818	57.3	%	$	16,614	55.2	%
Route-based pickup services	6,750		20.6	%	6,647		22.0	%
Unused medications	4,494		13.7	%	4,074		13.5	%
Third party treatment services	85		0.3	%	314		1.0	%
Other (1)	2,646		8.1	%	2,513		8.3	%
Total revenues	$	32,793	100.0	%	$	30,162	100.0	%

(1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items with single performance obligations.

Vendor Managed Inventory ("VMI") - 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. During the three and ~~nine~~six months ended ~~March~~December 31, 2021, the Company recorded billings from inventory builds that are held in VMI under these service agreements of ~~$0.3~~$1.7 million and ~~$3.8~~$1.8 million, respectively. During the three and ~~nine~~six months ended ~~March~~December 31, 2020, the Company recorded billings from inventory builds that are held in VMI under these service agreements of ~~$0.5~~$2.5 million and ~~$2.9~~$3.5 million, respectively. As of ~~March~~December 31, 2021 and June 30, ~~2020,~~2021, ~~$3.9~~$4.9 million and ~~$2.8~~$3.7 million, respectively, of solutions sold through that date were held in ~~vendor managed inventory~~VMI 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 maibacks 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 during the ~~three and nine~~six months ended ~~March~~December 31, 2021 and 2020 related to contract liabilities recorded as of June 30, 2021 and 2020 ~~and 2019~~were ~~$0.3~~$5.2 million and ~~$2.4~~$2.1 million, 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 valuation allowances 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~~No such allowance ~~to reduce~~was deemed necessary based on the Company's assessment of the recoverability of 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~~assets.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

allowance against its deferred tax assets on the basis of the Company's reassessment of the recoverability of its deferred tax assets. During the nine months ended March 31, 2021, the Company's net operating losses were completely utilized.

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.

~~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 its 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 the 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 0 impairment during the prior year ended June 30, 2020 and there have been no triggering events since that date that would warrant further impairment testing.

NOTE 4 – 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 ~~March~~December 31, 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.

NOTE 5 – INCOME TAXES

The Company’s effective tax rate for the ~~three and nine~~six months ended ~~March~~December 31, 2021 ~~was 23.7%~~ and ~~23.8%, respectively and for the three and nine months ended March 31,~~ 2020 was ~~3.4%~~29.7% and ~~47.6%~~24.8%, respectively. During the ~~three and nine~~six months ended ~~March~~December 31, 2021 and 2020, the effective tax rate is based on the statutory federal tax rate of 21%~~, now that the valuation has been removed since June 30, 2020,~~ as well as an approximated 5% state income tax rate net of the federal benefit. During the three and nine months ended March 31, 2020, the effective tax rate represented the deferred tax expense related to the effects of indefinite lived intangible assets, such as goodwill, which could not be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets as well as the effects of the state income tax expense for the period.

~~SHARPS COMPLIANCE CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

NOTE 6 – LEASES

The Company has operating leases for real estate, field equipment, office equipment and vehicles and financing leases for ~~vehicles.~~vehicles and office equipment. Operating leases are included in Operating Lease Right of Use ("ROU") Asset and Operating Lease Liability on our Condensed Consolidated Balance Sheets. Financing leases are included in Financing Lease ROU Asset and Financing Lease Liability on the Condensed Consolidated Balance Sheets.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the three and ~~nine~~six months ended ~~March~~December 31, 2021 and 2020, lease cost amounts, which reflect the fixed rent expense associated with operating and financing leases, are as follows (in thousands):


		Three-Months Ended March 31,				Nine-Months Ended March 31,					Three-Months Ended December 31,				Six-Months Ended December 31,
		2021		2020		2021		2020			2021		2020		2021		2020
Lease cost (1) - fixed rent expense:	Lease cost (1) - fixed rent expense:									Lease cost (1) - fixed rent expense:
Operating lease cost included in:	Operating lease cost included in:									Operating lease cost included in:
Cost of revenues	Cost of revenues	$	613	$	457	$	1,805	$	1,342	Cost of revenues	$	671	$	621	$	1,324	$	1,192
Selling, general and administrative	Selling, general and administrative	107		123		333		305		Selling, general and administrative	112		113		222		226
Finance lease cost included in:
Financing lease cost included in:										Financing lease cost included in:
Cost of revenues (amortization expense)	Cost of revenues (amortization expense)	19		3		54		9		Cost of revenues (amortization expense)	24		18		89		36
Interest expense	Interest expense	4		0		12		1		Interest expense	7		4		15		8
Total	Total	$	743	$	583	$	2,204	$	1,657	Total	$	814	$	756	$	1,650	$	1,462

(1) Short-term lease cost and variable lease cost were not significant during the period.

During the ~~nine~~six months ended ~~March~~December 31, 2021 and 2020, the Company had the following cash and non-cash activities associated with leases (in thousands):


		Nine-Months Ended March 31,					Six-Months Ended December 31,
		2021		2020			2021		2020
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:					Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow for operating leases	Operating cash outflow for operating leases	$	2,080	$	1,647	Operating cash outflow for operating leases	$	1,553	$	1,357
Non-cash changes to the ROU Asset and Lease Liability
Non-cash changes to the Operating ROU Asset and Operating Lease Liability						Non-cash changes to the Operating ROU Asset and Operating Lease Liability
Additions and modifications to ROU asset obtained from new operating lease liabilities	Additions and modifications to ROU asset obtained from new operating lease liabilities	$	2,382	$	5,436	Additions and modifications to ROU asset obtained from new operating lease liabilities	$	2,170	$	1,688
Additions to ROU asset obtained from operating lease liabilities upon adoption of new guidance		$	0	$	4,591

Additions to ROU asset obtained from new financing lease liabilities	Additions to ROU asset obtained from new financing lease liabilities	$	314	$	138	Additions to ROU asset obtained from new financing lease liabilities	$	190	$	—

As of ~~March~~December 31, 2021, the weighted average remaining lease term for all operating and financing leases is ~~3.97~~3.93 years and 5.07 years. The weighted average discount rate associated with operating and financing leases as of ~~March~~December 31, 2021 is ~~4.1%.~~4% and 3%, respectively.

The future payments due under operating leases as of December 31, 2021 is as follows (in thousands):


Future payments due in the twelve months ended December 31,	Operating lease		Financing lease
2022	$	2,780	$	217
2023	2,592		215
2024	2,338		215
2025	1,662		204
2026	485		169
Thereafter	92		52
Total undiscounted lease payments	9,949		1,071
Less effects of discounting	(740)		(78)
Lease liability recognized	$	9,209	$	993

Effective January 24, 2022, the Company entered into a lease agreement for 27,318 square feet of additional warehouse space in Houston, Texas. This lease extends through January 23, 2027. The blended base rent for the first year of the Term is $5.76 per square foot with subsequent annual increases of 2.5%. The future minimum lease payments for the extended lease will be

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~The future payments due under operating leases as of March 31, 2021 is as follows (in thousands):~~

Future payments due in the twelve months ended March 31,
2022 $ 2,696
2023 2,138
2024 1,951
2025 1,686
2026 778
Thereafter 0
Total undiscounted lease payments 9,249
Less effects of discounting (701)
Lease liability recognized $ 8,548

On January 22, 2021, the Company exercised its option to purchase real estate in Pennsylvania that it had previously leased. As a result, the Operating Lease ROU Asset and Operating Lease Liability decreased by $0.9an additional $0.1 million, ~~the Company's future payments due under operating leases decreased by $1.2 million; Property, Plant and Equipment increased by $0.9~~$0.2 million, $0.2 million, $0.2 million, $0.2 million and ~~Notes Payable increased by $0.9 million.~~$0.2 million for the twelve months ended December 31, 2022, 2023, 2024, 2025, 2026, and 2027, respectively.

NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT

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 (“Credit Agreement”). The amended Credit Agreement, which expires on December 28, 2023, provides for a $14.0 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) $6.0 million for working capital, letters of credit (up to $2.0 million) and general corporate purposes, (ii) $8.0 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 ~~March~~December 31, 2021 was approximately 3.0%. The Company pays a fee of 0.25% per annum on the unused amount of the committed 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 ~~2.74%~~2.73% on ~~March~~December 31, 2021. The Company has entered into a forward rate lock which fixed 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%~~4%.

At December 31, 2021 and June 30, 2021, long-term debt consisted of the following (in thousands):


	December 31, 2021		June 30, 2021
Acquisition loan, monthly payments of $43; maturing March 2022	$	173	$	431
Equipment loan, monthly payments of $17; maturing August 2024, net of debt issuance costs of $34	731		830
Real estate loans, monthly payments of $9; maturing August 2024 and January 2026	2,748		2,803

Total long-term debt	3,652		4,064
Less: current portion	480		735
Long-term debt, net of current portion	$	3,172	$	3,329

The Company has availability under the Credit Agreement of $13.3 million ($5.3 million for the working capital and $8.0 million for acquisitions) as of December 31, 2021 with the option to extend the availability up to $17.3 million. The Company has $0.7 million in letters of credit outstanding as of December 31, 2021.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 providing that the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Some of the uncertainties related to the Company’s operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on operations or mandates to provide products or services), impacts on the supply chain, and the effect on customer demand or changes to operations. In addition, the health of the Company’s workforce, and its ability to meet staffing needs in its route-based, treatment and distribution operations and other critical functions are uncertain and is vital to its operations.

The PPP Loan certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. While the Company does have availability under its Credit Agreement, $8.0 million of such availability can only be used for acquisitions and the $6.0 million that is available is in place to support working capital needs, along with current cash on hand. Further, the Company has a limited market capitalization and lack of history of being able to access the capital markets and as a result, the Company believes it meets the certification requirements.

The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The term of the Company’s PPP Loan is ~~two years~~. The Company has applied for forgiveness of the PPP Loan via its existing commercial bank under the guidelines provided by the Small Business Administration ("SBA") and the Department of Treasury. The annual interest rate on the PPP Loan is 1.0% and no payments of principal or interest are due while the application for forgiveness is under review. If the application for forgiveness is denied, equal monthly payments of principal and interest will be made through the maturity date of April 2022. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need.

~~At March 31, 2021 and June 30, 2020, long-term debt consisted of the following (in thousands):~~

March 31, 2021 June 30, 2020
Acquisition loan, monthly payments of $43; maturing March 2022 $ 560 $ 948
Equipment loan, monthly payments of $17; maturing August 2024, net of debt issuance costs of $44 879 929
Real estate loans, monthly payments of $9; maturing August 2024 and January 2026 2,830 1,103
Paycheck Protection Program loan 2,183 2,183
Total long-term debt 6,452 5,163
Less: current portion 2,836 1,658
Long-term debt, net of current portion $ 3,616 $ 3,505

~~The Company has availability under the Credit Agreement of~~ ~~$13.9 million~~ ~~($5.9 million for the working capital and $8.0 million for acquisitions) as of March 31, 2021 with the option to extend the availability up to $17.9 million. The Company has $0.1 million~~ ~~in letters of credit outstanding as of March 31, 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 agreements. The Company was in compliance with all the financial covenants under the Credit and Loan Agreements as of ~~March~~December 31, 2021.

~~SHARPS COMPLIANCE CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Payments due on long-term debt subsequent to ~~March~~December 31, 2021 are as follows (in thousands):

Twelve Months Ending March 31,
2022 $ 2,836
2023 527
2024 316
2025 316
2026 and thereafter 2,501
$ 6,496


Twelve Months Ending December 31,
2022	$	480
2023	320
2024	2,169
2025	44
2026	673
	$	3,686

NOTE 8 – 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 three and ~~nine~~six months ended ~~March~~December 31, 2021 and 2020 is as follows (in thousands):


		Three-Months Ended March 31,				Nine-Months Ended March 31,					Three-Months Ended December 31,				Six-Months Ended December 31,
		2021		2020		2021		2020			2021		2020		2021		2020
Stock-based compensation expense included in:	Stock-based compensation expense included in:									Stock-based compensation expense included in:
Cost of revenues	Cost of revenues	$	0	$	1	$	0	$	4	Cost of revenues	$	5	$	—	$	14	$	—
Selling, general and administrative	Selling, general and administrative	530		146		832		368		Selling, general and administrative	344		140		615		302
Total	Total	$	530	$	147	$	832	$	372	Total	$	349	$	140	$	629	$	302

NOTE 9 - EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income ~~(loss)~~ by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income ~~(loss)~~ by the weighted average number of common shares after considering the 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.

The Company’s restricted stock awards are ~~treated~~considered participating securities as ~~outstanding for earnings per share calculations since these~~the 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 two-class method presentation of the ~~shares of restricted stock are included in the calculation of~~ basic and diluted EPS ~~using the two-class method. For the periods~~is not presented as the amount of earnings allocated to the participating securities was not ~~material.~~material for the periods presented. Instead, the unvested awards are included in the diluted EPS.

1514

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per-share amounts):


		Three-Months Ended March 31,				Nine-Months Ended March 31,					Three-Months Ended December 31,				Six-Months Ended December 31,
		2021		2020		2021		2020			2021		2020		2021		2020
Net income (loss) as reported		$	6,850	$	(1,556)	$	7,785	$	100
Net income as reported										Net income as reported	$	1,437	$	1,228	$	647	$	935

Weighted average common shares outstanding	Weighted average common shares outstanding	16,556		16,264		16,481		16,211		Weighted average common shares outstanding	19,245		16,497		18,562		16,444
Effect of dilutive stock options	Effect of dilutive stock options	631		0		497		101		Effect of dilutive stock options	155		432		94		431
Weighted average diluted common shares outstanding	Weighted average diluted common shares outstanding	17,187		16,264		16,978		16,312		Weighted average diluted common shares outstanding	19,400		16,929		18,656		16,875

Net income (loss) per common share
Net income per common share										Net income per common share

Basic		$	0.41	$	(0.10)	$	0.47	$	0.01
Diluted		$	0.40	$	(0.10)	$	0.46	$	0.01

Basic and Diluted										Basic and Diluted	$	0.07	$	0.07	$	0.03	$	0.06
Employee stock options excluded from computation of dilutive income per share amounts because their effect would be anti-dilutive	Employee stock options excluded from computation of dilutive income per share amounts because their effect would be anti-dilutive	0		131		0		296		Employee stock options excluded from computation of dilutive income per share amounts because their effect would be anti-dilutive	269		—		269		25

NOTE 10 - EQUITY TRANSACTIONS

During the three and ~~nine~~six months ended ~~March~~December 31, 2021 and 2020, respectively, stock options to purchase shares of the Company's common stock were exercised as follows:


		Three-Months Ended March 31,				Nine-Months Ended March 31,					Three-Months Ended December 31,				Six-Months Ended December 31,
		2021		2020		2021		2020			2021		2020		2021		2020

Options exercised	Options exercised	72,750		114,844		141,281		134,194		Options exercised	—		18,000		—		68,531
Proceeds (in thousands)	Proceeds (in thousands)	$	314	$	518	$	625	$	576	Proceeds (in thousands)	$	—	$	86	$	—	$	311
Average exercise price per share	Average exercise price per share	$	4.32	$	4.51	$	4.42	$	4.29	Average exercise price per share	$	—	$	4.79	$	—	$	4.53

As of ~~March~~December 31, 2021, there was ~~$0.3~~$0.8 million and $0.9 million of stock compensation expense related to non-vested options and non-vested restricted stock awards, respectively, which is expected to be recognized over a weighted average ~~period~~periods of ~~1.93~~2.68 years and 2.41 years, respectively.

On August 30, 2021, the Company closed its previously announced underwritten secondary offering of a total of 2,070,000 shares of its common stock at a public offering price of $8.65 per share, including the exercise in full by the underwriter of its option to purchase an additional 270,000 shares to cover over-allotments in connection with the offering. After the underwriting discount and offering expenses payable by the Company of $1.1 million, the Company received net proceeds of approximately $16.8 million.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 11 – INVENTORY

The components of inventory are as follows (in thousands):


		March 31, 2021		June 30, 2020			December 31, 2021		June 30, 2021
Raw materials	Raw materials	$	1,821	$	1,402	Raw materials	$	2,599	$	2,040
Finished goods	Finished goods	3,545		5,300		Finished goods	5,179		5,063
Total inventory	Total inventory	5,366		6,702		Total inventory	7,778		7,103
Less: current portion	Less: current portion	4,378		5,638		Less: current portion	6,821		6,114
Inventory, net of current portion	Inventory, net of current portion	$	988	$	1,064	Inventory, net of current portion	$	957	$	989

The current portion of inventory includes amounts which the Company expects to sell in the next twelve month period based on historical sales.

NOTE 12 - ACQUISITIONS

On October 22, 2021, the Company acquired Affordable Medical Waste LLC, a route-based provider of medical waste solutions with over 500 route-based customer locations in the Midwest, primarily in Indiana, for $2.2 million, net of cash acquired of $0.1 million, paid in cash from funds on hand. This tuck-in acquisition enhances the Company's presence in the Midwest and improves route density in the service area.

The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):


Accounts receivable	$	65
Fixed assets	145
Intangibles	771
Goodwill	1,261
Accounts payable and accrued liabilities	(61)
Total purchase price, net of cash acquired	$	2,181

Intangibles is primarily comprised of amounts allocated to customer relationships in the amount of $0.8 million. The fair value of the fixed assets were determined using the market approach (level 2 inputs) whereas the fair value of the customer relationships was determined using the income approach (level 3 inputs).

During the three and six months ended December 31, 2021, the Company incurred $0.2 million of acquisition related expenses for investment banking, legal and accounting fees which are included within selling, general and administrative expenses on our condensed consolidated statements of operations. The results of operations of the acquired business have been included in the condensed consolidated statements of operations from the date of acquisition.

Pro forma results of operations for Affordable Medical Waste are not presented because the pro forma effects were not material to the Company's consolidated results of operations. The goodwill recorded for the acquisition will be deductible for income taxes.

The goodwill recognized for the acquisitions since July 1, 2015 is attributable to expected revenue synergies generated by the integration of our products and services with those acquisitions and cost synergies resulting from the consolidation or elimination of certain functions.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains certain forward-looking statements and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words "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 the known and unknown risks, uncertainties and assumptions related to certain factors, including without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein 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 Quarterly Report on Form 10-Q or refer to our 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.

GENERAL

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 ~~generators of~~ 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 ~~dependent~~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.

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 ~~abuse.~~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 ~~Recycling~~Recycle System™ for single-use devices ~~(SUDs)~~("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 ~~for~~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.

~~Uncertainty~~Significant Developments During the First Quarter of Fiscal Year 2022

Capital Markets Activity:

On August 30, 2021, the Company closed its previously announced underwritten secondary offering of a total of 2,070,000 shares of its common stock at a public offering price of $8.65 per share, including the exercise in full by the underwriter of its option to purchase an additional 270,000 shares to cover over-allotments in connection with the offering. After the underwriting discount and offering expenses payable by the Company, the Company received net proceeds of approximately $16.8 million.

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 three and ~~nine~~six months ended ~~March~~December 31, 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 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 through June 30, 2020.~~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~~mid-March 2020 through June 2020. Offsetting this ~~has been~~through most of fiscal year ended June 30, 2021 was 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”) ~~utilized~~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 ~~2020~~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~~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 ~~is being~~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~~ongoing customer demand related to ~~the 2020 season flu~~immunizations overall and the ~~potential~~continued rollout of COVID-19 ~~vaccine;~~vaccines and boosters as well as increased COVID-19 testing;

•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-19 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 was established as part of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.

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 ~~as well as~~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,~~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 three and ~~nine~~six months ended ~~March~~December 31, 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 1A, Risk factors in the Company's annual report on form 10-K for the year ended June 30, ~~2020.~~2021.

RESULTS OF OPERATIONS

The following analyzes changes in the condensed consolidated operating results and financial condition of the Company during the three and ~~nine~~six months ended ~~March~~December 31, 2021 and 2020. The following table sets forth for the periods indicated certain items from the Company's Condensed Consolidated Statements of Operations (dollars in thousands and percentages expressed as a percentage of revenues, unaudited):

Three-Months Ended March 31, Nine-Months Ended March 31,
2021 % 2020 % 2021 % 2020 %
Revenues $ 27,528 100.0 % $ 10,414 100.0 % $ 57,690 100.0 % $ 38,578 100.0 %
Cost of revenues 14,129 51.3 % 8,191 78.7 % 35,031 60.7 % 26,999 70.0 %
Gross profit 13,399 48.7 % 2,223 21.3 % 22,659 39.3 % 11,579 30.0 %
SG&A expense 4,181 15.2 % 3,600 34.6 % 11,725 20.3 % 10,718 27.8 %
Depreciation and amortization 216 0.8 % 201 1.9 % 625 1.1 % 602 1.6 %
Operating Income (Loss) 9,002 32.7 % (1,578) (15.2) % 10,309 17.9 % 259 0.7 %
Total other expense (29) (0.1) % (32) (0.3) % (93) (0.2) % (68) (0.2) %
Income (loss) before income taxes 8,973 32.6 % (1,610) (15.5) % 10,216 17.7 % 191 0.5 %
Income tax expense (benefit) 2,123 7.7 % (54) (0.5) % 2,431 4.2 % 91 0.2 %
Net Income (Loss) $ 6,850 24.9 % $ (1,556) (14.9) % $ 7,785 13.5 % $ 100 0.3 %


	Three-Months Ended December 31,								Six-Months Ended December 31,
	2021		%		2020		%		2021		%		2020		%
Revenues	$	18,878	100.0	%	$	17,011	100.0	%	$	32,793	100.0	%	$	30,162	100.0	%
Cost of revenues	12,271		65.0	%	11,374		66.9	%	22,765		69.4	%	20,902		69.3	%
Gross profit	6,607		35.0	%	5,637		33.1	%	10,028		30.6	%	9,260		30.7	%
SG&A expense	4,388		23.2	%	3,756		22.1	%	8,588		26.2	%	7,544		25.0	%
Depreciation and amortization	236		1.3	%	205		1.2	%	454		1.4	%	409		1.4	%
Operating Income	1,983		10.5	%	1,676		9.9	%	986		3.0	%	1,307		4.3	%
Total other expense	(17)		(0.1)	%	(37)		(0.2)	%	(66)		(0.2)	%	(64)		(0.2)	%
Income before income taxes	1,966		10.4	%	1,639		9.6	%	920		2.8	%	1,243		4.1	%
Income tax expense	529		2.8	%	411		2.4	%	273		0.8	%	308		1.0	%
Net Income	$	1,437	7.6	%	$	1,228	7.2	%	$	647	2.0	%	$	935	3.1	%

THREE MONTHS ENDED ~~MARCH~~DECEMBER 31, 2021 AS COMPARED TO THREE MONTHS ENDED ~~MARCH~~DECEMBER 31, 2020

Total revenues for the three months ended ~~March~~December 31, 2021 of ~~$27.5~~$18.9 million increased compared to the total revenues for the three months ended ~~March~~December 31, 2020 of ~~$10.4~~$17.0 million. The increase in revenue is mainly due to ~~increased billings in the Retail, Professional and Home Health Care markets. The net increase in billings is partially offset by current year deferred revenue net of~~higher product returns on sales in prior ~~periods.~~periods net of current year deferred revenue plus increased billings in the Professional and Retail markets. The net increase in revenue is partially offset by decreases in billings in the Pharmaceutical Manufacturer, Home Health Care and Long-Term Care markets. The components of billings by market are as follows (in thousands, unaudited):


		Three-Months Ended March 31,							Three-Months Ended December 31,
		2021		2020		Variance			2021		2020		Variance
BILLINGS BY MARKET:	BILLINGS BY MARKET:							BILLINGS BY MARKET:
Retail	Retail	$	21,714	$	2,314	$	19,400	Retail	$	6,365	$	6,139	$	226
Professional	Professional	4,606		3,885		721		Professional	5,199		4,538		661
Home Health Care	Home Health Care	2,299		1,663		636		Home Health Care	2,028		2,832		(804)

Pharmaceutical Manufacturer	Pharmaceutical Manufacturer	567		857		(290)		Pharmaceutical Manufacturer	1,901		3,062		(1,161)
Long-Term Care	Long-Term Care	973		758		215		Long-Term Care	752		1,060		(308)
Government	Government	642		571		71		Government	564		497		67
Environmental	Environmental	76		38		38		Environmental	54		179		(125)
Other	Other	131		240		(109)		Other	137		159		(22)
Subtotal	Subtotal	31,008		10,326		20,682		Subtotal	17,000		18,466		(1,466)
GAAP Adjustment *	GAAP Adjustment *	(3,480)		88		(3,568)		GAAP Adjustment *	1,878		(1,455)		3,333
Revenue Reported	Revenue Reported	$	27,528	$	10,414	$	17,114	Revenue Reported	$	18,878	$	17,011	$	1,867

*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 3 “Significant Accounting Policies - Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.

The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings, unaudited):


		Three-Months Ended March 31,									Three-Months Ended December 31,
		2021		% Total		2020		% Total			2021		% Total		2020		% Total
BILLINGS BY SOLUTION:	BILLINGS BY SOLUTION:									BILLINGS BY SOLUTION:
Mailbacks	Mailbacks	$	24,373	78.5	%	$	4,614	44.7	%	Mailbacks	$	10,192	60.0	%	$	11,907	64.4	%
Route-based pickup services	Route-based pickup services	3,597		11.6	%	2,625		25.4	%	Route-based pickup services	3,551		20.9	%	3,491		18.9	%
Unused medications	Unused medications	2,078		6.7	%	2,111		20.4	%	Unused medications	1,865		11.0	%	1,713		9.3	%
Third party treatment services	Third party treatment services	76		0.2	%	38		0.4	%	Third party treatment services	54		0.3	%	179		1.0	%
Other (1)	Other (1)	884		3.0	%	938		9.1	%	Other (1)	1,338		7.8	%	1,176		6.4	%
Total billings	Total billings	31,008		100.0	%	10,326		100.0	%	Total billings	17,000		100.0	%	18,466		100.0	%
GAAP adjustment (2)	GAAP adjustment (2)	(3,480)				88				GAAP adjustment (2)	1,878				(1,455)
Revenue reported	Revenue reported	$	27,528			$	10,414			Revenue reported	$	18,878			$	17,011

(1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.

(2)Represents the net impact of the revenue recognition adjustments required to arrive at reported GAAP revenue. Customer billings include 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 products 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 to related sales are recorded.

The ~~increase~~net decrease in billings was mainly attributable to increased billings in the ~~the Retail ($19.4 million),~~ Professional ($0.7 million)~~, Home Health Care ($0.6 million)~~ and ~~Long-Term Care markets~~Retail ($0.2 million) ~~partially~~markets offset by decreased billings in the Pharmaceutical Manufacturer ($1.2 million), Home Health Care ($0.8 million) and Long-Term Care ($0.3 million) markets. Professional market ~~. The~~billings increased 15% to $5.2 million for the three months ended December 31, 2021 as compared to $4.5 million for the three months ended December 31, 2020 consistent with a 17% increase in ~~the~~route-based customer locations. Retail market billings ~~is primarily due~~grew 4% to ~~increased~~$6.4 million in the second quarter of fiscal 2022 as compared to $6.1 million in the same prior year period. Within the retail market, immunization related orders of $19.5 million. The increase in the Professional market billings reflected organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sectors. This market, which is comprised of physicians, clinics, dentists, surgery centers, labs, veterinarians and other healthcare providers, has shown continued recovery compared to the March 2020 pre-pandemic time period as new customer locations have been added. Home Health Care market billings increased 38% to $2.3were down slightly at$4.6 million in the ~~third~~second quarter of fiscal ~~2021~~2022 compared to $1.7 million in the third quarter of fiscal 2020 related primarily to the timing of distributor orders. Long-Term Care market billings increased 28% to $1.0 million in the third quarter of fiscal 2021 compared to $0.8$4.8 million in the prior ~~year period, related to an increased volume of COVID-19 related waste management as well as new customers.~~year. Pharmaceutical Manufacturer market billings decreased by $1.2 million to $1.9 million in the second quarter of fiscal 2022 as compared to $3.1 million in the same prior year period due to the timing of inventory builds for patient support ~~programs.~~programs, driving over half of the $1.7 million decrease in mailback solution billings. Long-Term Care billings decreased by $0.3 million to $0.8 million in the second quarter of fiscal 2022 compared to $1.1 million in the prior year period, related primarily to heightened volumes of COVID-19 related waste management in the prior year, mostof which adversely impacted the route-based business customer billings. Home Health Care market billings decreased $0.8 million to $2.0 million in the second quarter of fiscal 2022 compared to $2.8 million in the second quarter of fiscal 2021 due to the timing of distributor orders, driving some of the $1.7 million decrease in mailback solution billings.

Billings for Mailbacks ~~increased 428%~~decreased 14.4% to ~~$24.4~~$10.2 million as compared to ~~$4.6~~$11.9 million in the prior year period and represented ~~78.5%~~60.0% of total billings. Billings for ~~Route-Based Pickup Services increased 37%~~Unused Medications grew 9% to ~~$3.6~~$1.9 million in the second quarter of fiscal 2022 as compared to ~~$2.6~~$1.7 million in the same prior year period ~~and represented 11.6%~~as result of ~~total billings.~~the 25% increase in the number of MedSafe Inner Liners sold.

Cost of revenues for the three months ended ~~March~~December 31, 2021 of ~~$14.1~~$12.3 million was ~~51.3%~~65.0% of revenues. Cost of revenues for the three months ended ~~March~~December 31, 2020 of ~~$8.2~~$11.4 million was ~~78.7%~~66.9% of revenues. The gross margin for the three months ended ~~March~~December 31, 2021 of ~~48.7%~~35.0% increased compared to the gross margin for the three months ended ~~March~~December 31, 2020 of ~~21.3%. Gross margins were positively impacted by operating leverage associated with~~33.1% due mainly to higher ~~revenue.~~revenues.

Selling, general and administrative (“SG&A”) expenses for the three months ended ~~March~~December 31, 2021 and 2020 were ~~$4.2~~$4.4 million and ~~$3.6~~$3.8 million, respectively. The increase in SG&A ~~expense was due~~is related primarily to $0.2 million in acquisition related costs, a ~~$0.4~~$0.2 million increase in the accrual of management incentive compensation ~~including both stock and cash, a $0.1 million increase in board compensation~~ and continued ~~investments~~investment in sales and marketing.

The Company reported operating income and income before income taxes of ~~$9.0~~$2.0 million for the three months ended ~~March~~December 31, 2021 as compared to operating ~~loss~~income and ~~loss~~income before income taxes of $1.7 million and $1.6 million, respectively, in the prior year period. Operating income and income before income taxes increased primarily due to higher ~~revenues and~~ gross ~~margin.~~profit (discussed above).

The Company’s effective tax rate for the three months ended ~~March~~December 31, 2021 and 2020 was ~~23.7%~~26.9% and ~~3.4%~~25.1%, respectively. During the three months ended March 31, 2021, the effective tax rate is based on the statutory federal tax rate of 21%, now that the valuation has been removed since June 30, 2020, as well as an approximated 5% state income tax rate net of the federal benefit. During the three months ended March 31, 2020, the effective tax rate represented the deferred tax expense related to the effects of indefinite lived intangible assets, such as goodwill, which could not be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets as well as the effects of the state income tax expense for the period.

The Company reported net income of ~~$6.9~~$1.4 million for the three months ended ~~March~~December 31, 2021 as compared to a net ~~loss~~income of ~~$1.6~~$1.2 million for the prior year period. Net income increased due to the increase in the operating income (discussed above).

The Company reported basic and diluted income per share of ~~$0.41 and $0.40, respectively~~$0.07 for both the three months ended ~~March~~December 31, 2021 ~~as compared to basic~~ and ~~diluted loss per share of $0.10 for the prior year period. Basic and diluted income per share increased due to the increase in net income (discussed above).~~2020.

~~NINE~~SIX MONTHS ENDED ~~MARCH~~DECEMBER 31, 2021 AS COMPARED TO ~~NINE~~SIX MONTHS ENDED ~~MARCH~~DECEMBER 31, 2020

Total revenues for the ~~nine~~six months ended ~~March~~December 31, 2021 of ~~$57.7~~$32.8 million increased by ~~$19.1~~$2.6 million, or ~~49.5%~~8.7%, over the total revenues for the ~~nine~~six months ended ~~March~~December 31, 2020 of ~~$38.6~~$30.2 million. The The increase in revenue is mainly due to higher product returns on sales in prior periods net of current year deferred revenue plus increased billings in the ~~Retail, Long-Term Care,~~ Professional and ~~Pharmaceutical Manufacturer~~Retail markets. The increase in billings is partially offset by ~~current year deferred revenue net of product returns on sales~~the decrease in ~~prior periods.~~billings in the Pharmaceutical Manufacturer, Home Healthcare and Long-Term Care markets. The components of billings by market are as follows (in thousands):


		Nine-Months Ended March 31,							Six-Months Ended December 31,
		(Unaudited)							(Unaudited)
		2021		2020		Variance			2021		2020		Variance
BILLINGS BY MARKET:	BILLINGS BY MARKET:							BILLINGS BY MARKET:
Retail	Retail	$	31,500	$	10,674	$	20,826	Retail	$	10,232	$	9,786	$	446
Professional	Professional	13,277		12,385		892		Professional	9,716		8,671		1,045
Home Health Care	Home Health Care	7,479		7,586		(107)		Home Health Care	3,967		5,180		(1,213)
Pharmaceutical Manufacturer	Pharmaceutical Manufacturer	4,808		4,068		740		Pharmaceutical Manufacturer	2,397		4,241		(1,844)
Long-Term Care	Long-Term Care	3,342		2,063		1,279		Long-Term Care	1,530		2,369		(839)
Government	Government	1,654		1,824		(170)		Government	1,271		1,012		259
Environmental	Environmental	390		123		267		Environmental	85		314		(229)
Other	Other	452		752		(300)		Other	526		321		205
Subtotal	Subtotal	62,902		39,475		23,427		Subtotal	29,724		31,894		(2,170)
GAAP Adjustment *	GAAP Adjustment *	(5,212)		(897)		(4,315)		GAAP Adjustment *	3,069		(1,732)		4,801
Revenue Reported	Revenue Reported	$	57,690	$	38,578	$	19,112	Revenue Reported	$	32,793	$	30,162	$	2,631

*Represents the net impact of the revenue recognition adjustments to arrive at reported GAAP revenue. Customer billings include all invoiced amounts for 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. Most of the difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as Contract Liability. See Note 3 “Significant Accounting Policies - Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.

The components of billings by solution are as follows (in thousands):


		Nine-Months Ended March 31,									Six-Months Ended December 31,
		2021		% Total		2020		% Total			2021		% Total		2020		% Total
BILLINGS BY SOLUTION:	BILLINGS BY SOLUTION:									BILLINGS BY SOLUTION:
Mailbacks	Mailbacks	$	42,719	67.9	%	$	21,280	53.8	%	Mailbacks	$	15,749	53.0	%	$	18,346	57.5	%
Route-based pickup services	Route-based pickup services	10,244		16.3	%	7,762		19.7	%	Route-based pickup services	6,750		22.7	%	6,647		20.8	%
Unused medications	Unused medications	6,152		9.8	%	6,815		17.3	%	Unused medications	4,494		15.1	%	4,074		12.8	%
Third party treatment services	Third party treatment services	390		0.6	%	123		0.3	%	Third party treatment services	85		0.3	%	314		1.0	%
Other (1)	Other (1)	3,397		5.4	%	3,495		8.9	%	Other (1)	2,646		8.9	%	2,513		7.9	%
Total billings	Total billings	62,902		100.0	%	39,475		100.0	%	Total billings	29,724		100.0	%	31,894		100.0	%
GAAP adjustment (2)	GAAP adjustment (2)	(5,212)				(897)				GAAP adjustment (2)	3,069				(1,732)
Revenue reported	Revenue reported	$	57,690			$	38,578			Revenue reported	$	32,793			$	30,162

(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 adjustment required 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 products 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 to related sales are recorded. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as Contract Liability.

The ~~increase~~decrease in billings was mainly due to ~~an increase~~increased billings in the Professional ($1.0 million) and Retail ($~~20.8~~0.4 million) markets offset by decreased billings in the Pharmaceutical Manufacturer ($1.8 million), Home Health Care ($1.2 million) and Long-Term Care ($~~1.3 million), Professional ($0.9 million) and Pharmaceutical Manufacturer ($0.7~~0.8 million) markets. ~~Retail~~Professional market billings increased ~~195%~~12.1% to ~~$31.5 million as compared to $10.7~~$9.7 million in the first ~~nine months~~half of fiscal 2020, due primarily to an increase in billings for immunization related orders of $21.1 million, partially offset by a decrease in unused medications billings in the retail market of $0.2 million. Long-Term Care market billings increased 62% to $3.3 million2022 as compared to $2.1 million in the prior year period related primarily to an increased volume of COVID-19 related waste management and ancillary supplies. Professional market billings increased 7% to $13.3 million in the first nine months of fiscal 2021 compared to $12.4$8.7 million in the same prior year period. ~~During the first nine months of fiscal 2021, Pharmaceutical Manufacturer~~Retail market billings increased ~~18%~~5% to ~~$4.8~~$10.2 million as compared to ~~$4.1~~$9.8 million in the first ~~nine months~~half of fiscal ~~2020. Billings~~2021, with billings for ~~Mailbacks, which represented 67.9% of total~~flu shot / COVID-19 related orders relatively flat at $6.4 million, and Retail market unused medications billings ~~increased 100.7%~~also relatively flat at $2.2 million. Long-Term Care market billings decreased 35% to ~~$42.7~~$1.5 million as compared to ~~$21.3~~$2.4 million in the prior year period ~~primarily~~due to heightened volumes of COVID-19 related towaste management in the ~~increase in billings related to immunization related orders and~~prior year. During the first half of fiscal 2022, Pharmaceutical Manufacturer ~~patient support programs. Billings for Route-Based Pickup Services increased 32%~~market billings decreased 44% to ~~$10.2~~$2.4 million as compared to ~~$7.8~~$4.2 million in the ~~prior year period and represented 16.3%~~first half of ~~total billings.~~fiscal 2021 mainly due to timing of inventory builds. Home Health Care market billings decreased 23% to $4.0 million for the first half of fiscal 2022 compared to $5.2 million in the first half of 2021 due to the timing of distributor orders.

Cost of revenues for the ~~nine~~six months ended ~~March~~December 31, 2021 of ~~$35.0~~$22.8 million was ~~60.7%~~69.4% of revenues. Cost of revenues for the ~~nine~~six months ended ~~March~~December 31, 2020 of ~~$27.0~~$20.9 million was ~~70.0%~~69.3% of revenues. ~~The~~Gross margin was essentially flat for the six months ended December 31, 2021 at 30.6% compared to gross margin for the ~~nine~~six months ended ~~March 31, 2021 of 39.3% increased compared to the gross margin for the nine months ended March~~December 31, 2020 of ~~30.0% due to leverage from increased revenue.~~30.7%.

~~Selling, general and administrative ("~~SG~~&A")~~&A expense for the ~~nine~~six months ended ~~March~~December 31, 2021 and 2020 was ~~$11.7~~$8.6 million and ~~$10.7~~$7.5 million, ~~respectively, but decreased as a percentage of revenue to 20%, compared to 28% in the first nine months of fiscal 2020,~~respectively. SG&A expense increased 14% related to $0.2 million in acquisition related costs, a ~~$0.4~~$0.5 million increase in the accrual of management incentive compensation ~~inlcuding both stock~~ and ~~cash, a $0.3 million increase in board member compensation and $0.4 million due to~~the Company’s continued investments in sales and marketing.

The Company reported operating income of ~~$10.3~~$1.0 million for the ~~nine~~six months ended ~~March~~December 31, 2021 compared to operating income of ~~$0.3~~$1.3 million for the ~~nine~~six months ended ~~March~~December 31, 2020. Operating income ~~increased~~decreased due to ~~higher gross margin partially offset by~~ higher SG&A expense (discussed above).

The Company reported income before income taxes of ~~$10.2~~$0.9 million for the ~~nine~~six months ended ~~March~~December 31, 2021 versus income before income taxes of ~~$0.2~~$1.2 million for the ~~nine~~six months ended ~~March~~December 31, 2020. Income before income taxes ~~increased~~decreased due to the ~~increase~~decrease in operating income (discussed above).

The Company’s effective tax rate for the ~~nine~~six months ended ~~March~~December 31, 2021 and 2020 was ~~23.8%~~29.7% and ~~47.6%~~24.8%, respectively.During the nine months ended March 31, 2021, the effective tax rate is based on the statutory federal tax rate of 21%, now that the valuation has been removed since June 30, 2020, as well as an approximated 5% state income tax rate net of the federal benefit. During the nine months ended March 31, 2020, the effective tax rate represented the deferred tax expense related to the effects of indefinite lived intangible assets, such as goodwill, which could not be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets as well as the effects of the state income tax expense for the period.

The Company reported net income of ~~$7.8~~$0.6 million for the ~~nine~~six months ended ~~March~~December 31, 2021 compared to net income of ~~$0.1~~$0.9 million for the ~~nine~~six months ended ~~March~~December 31, 2020. Net income ~~increased~~decreased due to the ~~increase~~decrease in income before taxes (discussed above).

The Company reported basic and diluted income per share of ~~$0.47 and $0.46, respectively,~~$0.03 for the ~~nine~~six months ended ~~March~~December 31, 2021 versus basic and diluted income per share of ~~$0.01~~$0.06 for the ~~nine~~six months ended ~~March~~December 31, 2020. Basic and diluted income per share ~~increased~~decreased due to the ~~increase~~decrease 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.

•~~Inventory levels as of March 31, 2021 were lower than levels at~~Since June 30, ~~2020 (decreased approximately 20%~~2019, inventory levels have been increased (approximately 71%) ~~due to heavy immunization related orders.~~ 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 ~~potential~~ COVID-19 vaccine, or supporting the pick-up and processing of ~~the significantly~~ increased volumes of healthcare waste from the long-term care industry, we are well positioned to take advantage of these growth opportunities.

•
~~Given the timing of when~~

To date, external effects from the COVID-19 ~~quarantine manifested itself (middle~~pandemic did not have a material adverse impact on the Company's financial position and results of ~~third quarter~~operations for the year ended June 30, 2021 or the three and six month periods ended December 31, 2021. The full extent of ~~fiscal year 2020) in~~ the ~~U.S. and in light~~future impacts of ~~ongoing~~ COVID-19 ~~cases,~~on the Company's operations is uncertain. A prolonged outbreak could have a material adverse impact on the financial ~~impacts to~~results and business operations of the ~~Company may have only partially been captured within the result of operations reported to date.~~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.

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 which is comprised of physicians, dentists, surgery centers, veterinary practices and ~~veterinary practices.~~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, ~~private practice physicians,~~physician groups, urgent care facilities, ambulatory surgical centers, labs, dialysis 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 ~~addresses this market from two directions: (i) field~~has made ongoing investments in sales ~~which focus~~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~~offering. Through targeted telemarketing initiatives, e-commerce driven website and ~~(ii) inside and online sales which~~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.

•InFrom July 2015 and 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 ~~15,400~~17,360 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. In October 2021, the Company acquired a route-based provider of medical waste solutions with over 500 locations in the Midwest, primarily in Indiana.

•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 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 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 are recognizing 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, which include data management, compliance reporting, fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides

self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection & Disposal System, respectively.

•A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unused medication disposal ~~solutions — the~~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 potential 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 ~~$11.2~~$36.0 million (used for working capital needs), debt of ~~$6.5~~$3.7 million and additional availability under the Credit and Loan Agreements as of ~~March~~December 31, 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 ~~$5.8~~$8.2 million to ~~$11.2~~$36.0 million at ~~March~~December 31, 2021 from ~~$5.4~~$27.8 million at June 30, ~~2020~~2021 due to the following:

Cash Flows from Operating Activities - Cash flow from operating activities was ~~positively~~negatively impacted by ~~income and~~ an increase in ~~working capital.~~accounts receivable of $3.3 million and decrease in contract liabilities of $3.0 million offset in part by net income of $0.6 million.

Cash Flows from Investing Activities - Cash flow from investing activities is for normal permitting and capital expenditures for plant and equipment additions of ~~$2.6~~$0.8 million ~~including approximately~~ ~~$0.9 million~~and a business acquisition of Affordable Medical Waste for ~~expenditures at the Company's treatment facility~~$2.2 million in ~~Carthage, Texas,~~ ~~$0.5~~ ~~million for expenditures for Nesquehoning, Pennsylvania and $0.2 million for molds and other equipment utilized in our production process.~~cash.

Cash Flows from Financing Activities - Cash flow from financing activities provided an increase in cash from proceeds from ~~long-term debt~~issuance of ~~$1.0 million~~common stock, net of underwriting fees and ~~proceeds from the exercise~~commissions of ~~stock options of $0.6~~$16.8 million partially offset by the repayment of debt of ~~$0.5~~$0.4 million.

~~Off-Balance Sheet Arrangements~~

~~The Company was not a party to any off-balance sheet transactions as defined in Item 303 of Regulation S-K for the nine months ended March 31, 2021 and the year ended June 30, 2020.~~

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~~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~~(August 21, ~~2019")~~2019) with monthly payments beginning in the month after the advancing period ~~ends based on a 20-year amortization for the real estate portion and on a 6-year amortization for the equipment portion of the Loan Agreement.~~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 ~~2.74%~~2.73% on ~~March~~December 31, 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 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.

The PPP Loan certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. While the Company does have availability under it Credit Agreement, $8.0 million of such availability can only be used for acquisitions and the $6.0 million that is available is in place to support working capital needs, along with current

cash on hand. Further, the Company has a limited market capitalization and lack of history of being able to access the capital markets and as a result, the Company believes it meets the certification requirements.

The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The term of the Company’s PPP Loan is two years. The Company has applied for forgiveness of the PPP Loan via its existing commercial bank under the guidelines provided by the Small Business Administration ("SBA") and the Department of Treasury. The annual interest rate on the PPP Loan is 1% and no payments of principal or interest are due while the application for forgiveness is under review. If the application for forgiveness is denied, equal monthly payments of principal and interest will be made through the maturity date of April 2022. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has recently indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need.

The Company has availability under the Credit Agreement of approximately ~~$13.9~~$13.3 million ($~~5.9~~5.3 million for the working capital and $8.0 million for acquisitions) as of ~~March~~December 31, 2021 with the option to extend the availability up to ~~$17.9~~$17.3 million (used to support working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant compliance). The Company also has ~~$0.1~~$0.7 million in letters of credit outstanding as of ~~March~~December 31, 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 and Loan Agreements. The Company was in compliance with all the financial covenants under the Credit and Loan Agreements as of ~~March~~December 31, 2021.

The Company utilizes performance bonds to support operations based on certain state requirements. At ~~March~~December 31, 2021, the Company had performance bonds outstanding covering financial assurance up to ~~$1.3~~$1.4 million.

Management believes that the Company’s current cash resources (cash on hand and cash flows from operations) will be sufficient to fund operations for at least the next twelve months.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The Company's critical accounting policies are included in the discussion entitled Critical Accounting Policies in Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, ~~2020,~~2021, as filed with the SEC. There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.

ITEM 4. 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 ~~March~~December 31, 2021 pursuant to Rules 13a-15(b) and 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 ~~March~~December 31, 2021.

Changes in Internal Control

During the three months ended ~~March~~December 31, 2021, there were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), that have materially affected, or are reasonably likely to materially affect the Company’s internal control system over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. 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 1A. RISK FACTORS

Refer to Item 1A. Risk Factors in the Company’s annual report on Form 10-K for the year ended June 30, ~~2020~~2021 for the Company’s risk factors. During the period ended ~~March~~December 31, 2021, there have been no changes to the Company's risk factors.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 6. EXHIBITS


(a)			Exhibits:

31.1			Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act (filed herewith)

31.2			Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act (filed herewith)

32.1			Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act (filed herewith)

32.2			Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act (filed herewith)

101.INS			XBRL Instance Document (filed herewith)

101.SCH			XBRL Taxonomy Extension Schema Document (filed herewith)

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)

101.DEF			XBRL Taxonomy Extension Linkbase Document (filed herewith)

101.LAB			XBRL Taxonomy Extension Label Linkbase Document (filed herewith)

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)

ITEMS 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			REGISTRANT:
			SHARPS COMPLIANCE CORP.

Dated: ~~May 5, 2021~~February 2, 2022			By: /s/ DAVID P. TUSA
			David P. Tusa
			Chief Executive Officer and President
			(Principal Executive Officer)


Dated: ~~May 5, 2021~~February 2, 2022			By: /s/ DIANA P. DIAZ
			Diana P. Diaz
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

2827


Future payments due in the twelve months ended March 31,
2022	$	2,696
2023	2,138
2024	1,951
2025	1,686
2026	778
Thereafter	0
Total undiscounted lease payments	9,249
Less effects of discounting	(701)
Lease liability recognized	$	8,548


Twelve Months Ending March 31,
2022	$	2,836
2023	527
2024	316
2025	316
2026 and thereafter	2,501
	$	6,496