Sharps Compliance 10Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q


ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2018


¨	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)

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 ý No o

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 ý 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 o	Accelerated Filer o	Non-accelerated Filer o (Do not check if a smaller reporting company)	Emerging growth company o	Smaller reporting company ý

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes o No ý

As of May 1, 2018, there were 16,082,021 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	3

	Condensed Consolidated Balance Sheets as of March 31, 2018 and June 30, 2017	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017	4

	Condensed Consolidated Statements of Operations for the nine months ended March 31, 2018 and 2017	5

	Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended March 31, 2018 and year ended June 30, 2017	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2018 and 2017	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 4.	Controls and Procedures	22

Part II	OTHER INFORMATION	22

Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	22

Item 6.	Exhibits	23

	SIGNATURES	23

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)



	March 31,			June 30,
	2018			2017

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	5,499		$	4,675
Accounts receivable, net of allowance for doubtful accounts of $95 and $78, respectively	6,103			7,553
Inventory, net	4,163			4,098
Prepaid and other current assets	761			694
TOTAL CURRENT ASSETS	16,526			17,020

PROPERTY, PLANT AND EQUIPMENT, net	6,538			6,543

OTHER ASSETS	159			120

GOODWILL	6,735			6,735

INTANGIBLE ASSETS, net	3,648			4,046

TOTAL ASSETS	$	33,606		$	34,464

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,836		$	1,710
Accrued liabilities	1,618			1,800
Current maturities of long-term debt	558			601
Deferred revenue	2,107			2,421
TOTAL CURRENT LIABILITIES	6,119			6,532

LONG-TERM DEFERRED REVENUE, net of current portion	475			478

OTHER LONG-TERM LIABILITIES	199			165

LONG-TERM DEBT, net of current portion	1,594			2,002

TOTAL LIABILITIES	8,387			9,177

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, $0.01 par value per share; 20,000,000 shares authorized; 16,377,636 and 16,304,027 shares issued, respectively, and 16,082,021 and 16,008,412 shares outstanding, respectively.	164			163
Treasury stock, at cost, 295,615 shares repurchased	(1,554		)	(1,554		)
Additional paid-in capital	28,520			28,063
Accumulated deficit	(1,911		)	(1,385		)
TOTAL STOCKHOLDERS' EQUITY	25,219			25,287

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	33,606		$	34,464

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,
	2018			2017

REVENUES	$	9,427		$	8,588
Cost of revenues	7,131			6,236
GROSS PROFIT	2,296			2,352

Selling, general and administrative	2,800			2,790
Depreciation and amortization	203			200

OPERATING LOSS	(707		)	(638		)

OTHER INCOME (EXPENSE)
Interest income	5			4
Interest expense	(23		)	(34		)
TOTAL OTHER EXPENSE	(18		)	(30		)

LOSS BEFORE INCOME TAXES	(725		)	(668		)

INCOME TAX EXPENSE	32			—

NET LOSS	$	(757	)	$	(668	)

NET LOSS PER COMMON SHARE - Basic and Diluted	$	(0.05	)	$	(0.04	)

WEIGHTED AVERAGE SHARES USED IN COMPUTING LOSS PER COMMON SHARE:
Basic and diluted	16,082			15,994

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,
	2018			2017

REVENUES	$	30,229		$	27,826
Cost of revenues	21,774			19,620
GROSS PROFIT	8,455			8,206

Selling, general and administrative	8,346			9,388
Depreciation and amortization	608			600

OPERATING LOSS	(499		)	(1,782		)

OTHER INCOME (EXPENSE)
Interest income	15			12
Interest expense	(70		)	(92		)
TOTAL OTHER EXPENSE	(55		)	(80		)

LOSS BEFORE INCOME TAXES	(554		)	(1,862		)

INCOME TAX BENEFIT	(28		)	—

NET LOSS	$	(526	)	$	(1,862	)

NET LOSS PER COMMON SHARE - Basic and Diluted	$	(0.03	)	$	(0.12	)

WEIGHTED AVERAGE SHARES USED IN COMPUTING LOSS PER COMMON SHARE:
Basic and diluted	16,046			15,930

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			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount		Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity

Balances, June 30, 2016		15,740,458	$	158	(295,615	)	$	(1,554	)	$	25,331		$	(92	)	$	23,843
Exercise of stock options		95,050	1		—		—			341			—			342
Stock-based compensation		—	—		—		—			496			—			496
Issuance of common shares for acquisition		415,527	4		—		—			1,895			—			1,899
Issuance of restricted stock		52,992	—		—		—			—			—			—
Net loss		—	—		—		—			—			(1,293		)	(1,293		)
Balances, June 30, 2017		16,304,027	163		(295,615	)	(1,554		)	28,063			(1,385		)	25,287
Stock-based compensation		—	—		—		—			375			—			375
Issuance of common shares for lease		20,617	—		—		—			83			—			83
Issuance of restricted stock		52,992	1		—		—			(1		)	—			—
Net loss		—	—		—		—			—			(526		)	(526		)
Balances, March 31, 2018		16,377,636	$	164	(295,615	)	$	(1,554	)	$	28,520		$	(1,911	)	$	25,219

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,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(526	)	$	(1,862	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	1,174			1,100
Loss on disposal of property, plant and equipment	—			10
Stock-based compensation expense	375			389
Deferred tax benefit	(37		)	—
Changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable	1,450			1,118
Inventory	101			(477		)
Prepaid and other assets	14			(192		)
Accounts payable and accrued liabilities	(111		)	335
Deferred revenue	(317		)	(239		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	2,123			182

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment	(800		)	(2,439		)
Cash proceeds from sale of property, plant and equipment	10			23
Additions to intangible assets	(58		)	(128		)
Payments for business acquisitions, net of cash acquired	—			(7,261		)
NET CASH USED IN INVESTING ACTIVITIES	(848		)	(9,805		)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options	—			342
Proceeds from long-term debt	—			5,600
Repayments of long-term debt	(451		)	(3,062		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	(451		)	2,880

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	824			(6,743		)

CASH AND CASH EQUIVALENTS, beginning of period	4,675			12,435

CASH AND CASH EQUIVALENTS, end of period	$	5,499		$	5,692

SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid	$	3		$	—

Interest paid on long-term debt	$	64		$	91

NON-CASH INVESTING AND FINANCING ACTIVITIES:

Issuance of common stock for acquisition	$	—		$	1,889
Issuance of common stock for lease	$	83		$	—
Unpaid consideration related to acquisitions	$	—		$	52
Transfer of equipment to inventory	$	166		$	130
Property, plant and equipment financed through accounts payable	$	89		$	66

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 and Citiwaste, LLC (collectively, “Sharps” or the “Company”). All significant intercompany accounts and transactions have been eliminated upon consolidation.

Business: Sharps is a leading 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 Medication Recovery System™, MedSafe^®, TakeAway Recycle System™,ComplianceTRAC^SM, 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 and Recovery System. The Company also offers its route-based pick-up service in a twenty-three (23) state region of the South, Southeast 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 31, 2018, the results of its operations for the three and nine months ended March 31, 2018 and 2017, cash flows for the nine months ended March 31, 2018 and 2017 and stockholders’ equity for the nine months ended March 31, 2018. The results of operations for the three and nine months ended March 31, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 2018. 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, 2017.

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition: The Company recognizes revenue when services are provided and from product sales when (i) goods are shipped or delivered, and title and risk of loss pass to the customer, (ii) the price is substantially fixed or determinable and (iii) collectability is reasonably assured except for those sales via multiple-deliverable revenue arrangements. Provisions for certain rebates, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed, at which point title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse. During the three and nine months ended March 31, 2018, the Company recorded revenue from inventory builds that are held in vendor managed inventory under these service agreements of $0.5 million and $2.4 million, respectively. During the three and nine months ended March 31, 2017, the Company recorded revenue from inventory builds that are held in vendor managed inventory under these service agreements of $0.7 million and $2.7 million, respectively. As of March 31, 2018 and June 30, 2017, $2.8 million and $2.7 million, respectively, of solutions sold through that date were held in vendor managed inventory pending fulfillment or shipment to patients of pharmaceutical manufacturers who offer these solutions to patients in an ongoing patient support program.

Certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System and various other solutions like the TakeAway Medication Recovery Systems referred to as “Mailbacks” and Sharps Pump and Asset Return Systems, referred to as “Pump Returns”) and can consist of up to three separate elements, or units of measure, as follows: (1) the sale of the compliance and container system, (2) return transportation and (3) treatment service. In accordance with the relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for separate units of accounting. The actual consideration received in a multiple-deliverable arrangement is then

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

allocated to the units based on their relative sales price. The selling price for the transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of the compliance and container system based on the product and services provided, including compliance with local, state and federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community, as well as storage and containment capabilities.

Revenue for the sale of the compliance and container is recognized upon delivery to the customer, at which time the customer takes title and assumes risk of ownership. Transportation revenue is recognized when the customer returns the compliance and container system and the container has been received at the Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been performed on the container. Since the transportation element and the treatment elements are undelivered services at the point of initial sale of the compliance and container, transportation and treatment revenue is deferred until the services are performed. The current and long-term portions of deferred revenues are determined through regression analysis and historical trends. Furthermore, through regression analysis of historical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the transportation and treatment elements are recognized at the point of sale.

Income Taxes: Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under GAAP, the valuation allowance has been recorded to reduce the Company’s deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.

Goodwill and Other Identifiable Intangible Assets: Finite-lived intangible assets are amortized over their respective estimated useful lives and evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Goodwill is assessed for impairment at least annually. The Company generally performs its annual goodwill impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of our single reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill present in our single reporting unit. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge. The Company performs its annual impairment assessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no impairment during the prior year ended June 30, 2017 and there have been no triggering events since that date that would warrant further impairment testing.

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.

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).

Fair Value of Financial Instruments: The Company considers the fair value of all financial instruments, including cash and cash equivalents, accounts receivable and accounts payable to approximate their carrying values at March 31, 2018 and June 30, 2017 due to their short-term nature. The carrying value of the Company’s debt approximates fair value due to the market rates of interest.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, and as subsequently amended, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a full retrospective approach or a modified retrospective approach to implement the standard. The guidance is effective for annual reporting periods beginning after December 15, 2017 (effective July 1, 2018 for the Company). The Company initiated a project to evaluate the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures, which included identifying the material revenues streams and reviewing a representative sample of contracts. The Company is still in process of finalizing its evaluation, but has identified that for mailback and unused medication solutions, under the new guidance, the Company will recognize revenue over two performance obligations rather than the three separate elements under the current guidance. The Company is still evaluating the quantitative impact to the amount and timing of revenue recognition for the change to the identified performance obligations for the mailback solution. The Company is still evaluating the impact of the new standard on route-based pick up solution. No material changes to the amount and timing of revenue recognition over the third party treatment and other solutions are expected. The Company expects to adopt the standard using the modified retrospective approach, which involves retrospectively adopting the standard by recording a cumulative effect adjustment to all uncompleted contracts at July 1, 2018. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.

In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess of twelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 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 nine months ended March 31, 2018 was (5.1)% reflecting the impact of the 2017 tax law change discussed below, net of estimated state income taxes. For the nine months ended March 31, 2018, the Company recorded a net income tax benefit of approximately $38,000, which was offset by estimated state income tax expense of $10,000. The Company’s effective tax rate for the three months ended March 31, 2018 was 4.4% due primarily to income tax expense related to the tax deductibility of goodwill amortization. No income tax expense was recorded for the nine months ended March 31, 2017 as it was not material due to the valuation allowance and net operating losses.

The Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017, contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21%. During the nine months ended March 31, 2018, the Company recorded a $38,000 deferred tax asset in Other Assets on the balance sheet, representing the net benefit of remeasuring its deferred tax assets for recoverable alternative minimum tax credits offset by deferred tax liabilities related to indefinite lived assets, such as goodwill, which cannot be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets. The Company's remaining net deferred tax assets continue to be fully offset by a valuation allowance. The Company's gross deferred tax assets and the offsetting valuation allowance decreased by approximately $0.8 million as a result of the reduction of the U.S. tax rate to 21%.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT

On March 29, 2017, the Company entered into to a credit agreement with a commercial bank (“Credit Agreement”). The Credit Agreement, which replaced the Company’s prior credit agreement, provides for a $14.0 million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and general corporate purposes and (ii) $8.0 million for acquisitions. 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 50% of eligible inventory and $3.0 million and was $2.1 million at March 31, 2018. 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) zero percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5%. The LIBOR Margin may increase to as high as 3.0% depending on the Company’s cash flow leverage ratio. The interest rate as of March 31, 2018 was approximately 4.25%. The Company pays a fee of 0.25% per annum on the unused amount of the line of credit.

At March 31, 2018, long-term debt consisted of the following (in thousands):



Non-interest bearing, unsecured note payable assumed in acquisition, monthly payments of $7; maturing September 2018.	$	41

Term loan, bearing interest at 4.25%, monthly payments of $43; maturing March 2022.	2,111

Total long-term debt	2,152
Less: current portion	558
Long-term debt, net of current portion	$	1,594

The Company has availability under the Credit Agreement of $11.8 million ($6.0 million for the working capital and $5.8 million for the acquisitions) as of March 31, 2018. The Company also has $40,000 in letters of credit outstanding as of March 31, 2018.

The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flow leverage ratio of no more than 3.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The Credit Agreement, which expires on March 29, 2019 for the working capital portion of the Credit Agreement, also contains customary events of default which, if uncured, may terminate the Credit Agreement and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount available under the Credit Agreement.

Payments due on long-term debt during each of the five years subsequent to March 31, 2018 are as follows (in thousands):



Twelve Months Ending March 31,
2019	$	558
2020	517
2021	517
2022	517
2023	43
	$	2,152

The Company utilizes performance bonds to support operations based on certain state requirements. At March 31, 2018, the Company had performance bonds outstanding covering financial assurance up to $0.6 million.

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7 – 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). During the three and nine months ended March 31, 2018 and 2017, stock-based compensation amounts are as follows (in thousands):



	Three-Months Ended March 31,				Nine-Months Ended March 31,
	2018		2017		2018		2017
Stock-based compensation expense included in:
Cost of revenues	$	6	$	8	$	33	$	33
Selling, general and administrative	108		108		342		356
Total	$	114	$	116	$	375	$	389

NOTE 8 - 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 as outstanding for earnings per share calculations since these shares have full voting rights and are entitled to participate in dividends declared on common shares, if any, and undistributed earnings. As participating securities, the shares of restricted stock are included in the calculation of basic EPS using the two-class method. For the periods presented, the amount of earnings allocated to the participating securities was not material.

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



	Three-Months Ended March 31,						Nine-Months Ended March 31,
	2018			2017			2018			2017
Net loss, as reported	$	(757	)	$	(668	)	$	(526	)	$	(1,862	)
��
Weighted average common shares outstanding	16,082			15,994			16,046			15,930
Effect of dilutive stock options	—			—			—			—
Weighted average diluted common shares outstanding	16,082			15,994			16,046			15,930

Net loss per common share
Basic and diluted	$	(0.05	)	$	(0.04	)	$	(0.03	)	$	(0.12	)

Employee stock options excluded from computation of dilutive loss per share amounts because their effect would be anti-dilutive	401			269			401			304

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9 - EQUITY TRANSACTIONS

During the three and nine months ended March 31, 2018 and 2017, 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,
	2018		2017		2018		2017
Options Exercised	—		19,300		—		95,050
Proceeds (in thousands)	$	—	$	84	$	—	$	342
Average exercise price per share	$	—	$	4.34	$	—	$	3.60

As of March 31, 2018, there was $0.4 million of stock compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 2.2 years.

During the nine months ended March 31, 2018, the Company issued 20,617 shares of common stock as a portion of consideration for a third-party lease agreement. The shares were issued at $4.00 per share based on the closing price on the date of grant. Non-cash expense recorded during the nine months ended March 31, 2018 was $25,000. The remaining cost will be amortized over the life of the lease and is included in Prepaid and Other Current Assets or Other Assets on the balance sheet.

NOTE 10 – GOODWILL AND INTANGIBLE ASSETS

At March 31, 2018 and June 30, 2017, intangible assets consisted of the following (in thousands):



		March 31, 2018							June 30, 2017
	Estimated Useful Lives	Original Amount		Accumulated Amortization			Net Amount		Original Amount		Accumulated Amortization			Net Amount
Customer relationships	7 years	$	3,007	$	(811	)	$	2,196	$	3,007	$	(490	)	$	2,517
Permits	6 - 15 years	1,430		(365		)	1,065		1,373		(288		)	1,085
Patents	5 - 17 years	383		(274		)	109		383		(264		)	119
Trade name	7 years	270		(68		)	202		270		(39		)	231
Non-compete	5 years	117		(41		)	76		117		(23		)	94
Total intangible assets, net		$	5,207	$	(1,559	)	$	3,648	$	5,150	$	(1,104	)	$	4,046

During both the nine months ended March 31, 2018 and 2017, amortization expense was $0.5 million. There have been no changes in the carrying amount of goodwill since June 30, 2017.

As of March 31, 2018, future amortization of intangible assets is as follows (in thousands):



Twelve Months Ending March 31,
2019	$	606
2020	606
2021	606
2022	586
2023	540
Thereafter	704
	$	3,648

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, 2018		June 30, 2017
Raw materials	$	1,374	$	1,272
Finished goods	2,789		2,826
Total	$	4,163	$	4,098

NOTE 12 – REVENUES BY SOLUTION

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



	Three-Months Ended March 31,
	2018		% Total		2017		% Total
REVENUES BY SOLUTION:
Mailbacks	$	4,602	48.8	%	$	4,997	58.2	%
Route-based pickup services	1,888		20.0	%	1,641		19.1	%
Unused medications	1,832		19.4	%	867		10.1	%
Third party treatment services	44		0.5	%	149		1.7	%
Other ⁽¹⁾	1,061		11.3	%	934		10.9	%
Total revenues	$	9,427	100.0	%	$	8,588	100.0	%


	Nine-Months Ended March 31,
	2018		% Total		2017		% Total
REVENUES BY SOLUTION:
Mailbacks	$	16,618	55.0	%	$	17,661	63.5	%
Route-based pickup services	5,479		18.1	%	4,686		16.8	%
Unused medications	4,321		14.3	%	2,400		8.6	%
Third party treatment services	815		2.7	%	291		1.0	%
Other ⁽¹⁾	2,996		9.9	%	2,788		10.1	%
Total revenues	$	30,229	100.0	%	$	27,826	100.0	%


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

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 "will," "may," "position," "plan," "potential," "continue," "anticipate," "believe," "expect," "estimate," "project" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to 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. 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 full-service national provider of comprehensive waste management services including medical, pharmaceutical and hazardous. Our solutions facilitate the proper collection, containment, transportation and treatment of numerous types of healthcare-related materials, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, or sharps, hazardous waste and unused consumer dispensed medications and over-the-counter drugs. We serve customers in multiple markets such as home health care, retail clinics and immunizing pharmacies, pharmaceutical manufacturers, professional offices (physicians, dentists and veterinarians), assisted living and long-term care facilities (assisted living, continuing care, long-term acute care, memory care and skilled nursing), government (federal, state and local), consumers, commercial and agriculture, as well as distributors to many of the aforementioned markets. We assist our customers in determining which of our solution offerings best fit their needs for the collection, containment, return transportation and treatment of medical waste, used healthcare materials, pharmaceutical waste, hazardous waste and unused dispensed medications. Our differentiated approach provides our customers the flexibility to return and properly treat medical waste, used healthcare materials or unused dispensed medications through a variety of solutions and products transported primarily through the United States Postal Service (“USPS”). For customers with facilities or locations that may generate larger quantities of medical waste, we integrate the route-based pick-up service into our complete offering. The benefits of this comprehensive offering include single point of contact, consolidated billing, integrated manifest and proof of destruction repository in addition to our cost savings. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and continued recurring revenue growth. We continue to take advantage of the many opportunities in all markets served as we educate the market place and as prospective customers become more aware of alternatives to traditional methods of disposal (i.e., route-based pick-up services).

Our key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, surgery centers, retail pharmacies and clinics and the professional market, which is comprised of physicians, dentists and veterinary practices. The Company’s flagship product, the Sharps^® Recovery System, is a comprehensive solution for the containment, transportation, treatment and tracking of medical waste and used healthcare materials. In October 2014, the Company launched MedSafe^®, a patent pending solution for the safe collection, transportation and proper disposal of unwanted and expired prescription medications including controlled substances from ultimate users. MedSafe has been designed to meet or exceed the regulations issued by the Drug Enforcement Administration (“DEA”) implementing the Secure and Responsible Drug Disposal Act of 2010 (the “Act”), which became effective October 9, 2014. In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. Additionally, the Company now services parts of Texas and Louisiana with route-based pickup services. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in the Northeast. The Company now offers its route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. Our other solutions include TakeAway Medication Recovery System™, TakeAway Recycle System™, ComplianceTRAC^SM, Universal Waste Shipback Systems, TakeAway Environmental Return System™, SharpsTracer^®, Sharps Secure^® Needle Disposal System, Complete Needle™ Collection & Disposal System, Pitch-It IV™ Poles, Asset Return System, Sharps^® MWMS™ (a Medical Waste Management System (“MWMS”)) and Spill Kit and Recovery System.

RESULTS OF OPERATIONS

The following analyzes changes in the consolidated operating results and financial condition of the Company during the three and nine months ended March 31, 2018 and 2017. 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 revenue):



	Three-Months Ended March 31,										Nine-Months Ended March 31,
	2018			%		2017			%		2018			%		2017			%
	(Unaudited)										(Unaudited)
Revenues	$	9,427		100.0	%	$	8,588		100.0	%	$	30,229		100.0	%	$	27,826		100.0	%
Cost of revenues	7,131			75.6	%	6,236			72.6	%	21,774			72.0	%	19,620			70.5	%
Gross profit	2,296			24.4	%	2,352			27.4	%	8,455			28.0	%	8,206			29.5	%
SG&A expense	2,800			29.7	%	2,790			32.5	%	8,346			27.6	%	9,388			33.7	%
Depreciation and amortization	203			2.2	%	200			2.3	%	608			2.0	%	600			2.2	%
Operating loss	(707		)	(7.5	)%	(638		)	(7.4	)%	(499		)	(1.7	)%	(1,782		)	(6.4	)%
Interest income	5					4					15					12
Interest expense	(23		)			(34		)			(70		)			(92		)
Total other expense	(18		)	(0.2	)%	(30		)	(0.3	)%	(55		)	(0.2	)%	(80		)	(0.3	)%
Loss before income taxes	(725		)	(7.7	)%	(668		)	(7.8	)%	(554		)	(1.8	)%	(1,862		)	(6.7	)%
Income tax expense (benefit)	32			0.3	%	—			—	%	(28		)	(0.1	)%	—			—	%
Net Loss	$	(757	)	(8.0	)%	$	(668	)	(7.8	)%	$	(526	)	(1.7	)%	$	(1,862	)	(6.7	)%

THREE MONTHS ENDED MARCH 31, 2018 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2017

Total revenues for the three months ended March 31, 2018 of $9.4 million increased by $0.8 million, or 9.8%, over the total revenues for the three months ended March 31, 2017 of $8.6 million. The increase in revenue is mainly due to increased billings across the Retail and Professional markets partially offset by decreased billings in the Pharmaceutical Manufacturer market. The components of billings by market are as follows (in thousands):



	Three-Months Ended March 31,
	(Unaudited)
	2018		2017		Variance
BILLINGS BY MARKET:
Professional	$	3,178	$	2,982	$	196
Home Health Care	1,872		1,873		(1		)
Retail	1,640		806		834
Pharmaceutical Manufacturer	973		1,377		(404		)
Assisted Living	657		625		32
Government	520		424		96
Environmental	44		149		(105		)
Other	232		195		37
Subtotal	9,116		8,431		685
GAAP Adjustment *	311		157		154
Revenue Reported	$	9,427	$	8,588	$	839

*Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped 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 and (ii) recognition of certain revenue associated with products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue. See Note 3 “Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.

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



	Three-Months Ended March 31,
	2018		% Total		2017		% Total
BILLINGS BY SOLUTION:
Mailbacks	$	4,291	47.1	%	$	4,840	57.4	%
Route-based pickup services	1,888		20.7	%	1,641		19.5	%
Unused medications	1,832		20.1	%	867		10.3	%
Third party treatment services	44		0.5	%	149		1.8	%
Other ⁽¹⁾	1,061		11.6	%	934		11.0	%
Total billings	$	9,116	100.0	%	$	8,431	100.0	%
GAAP adjustment ⁽²⁾	311				157
Revenue reported	$	9,427			$	8,588


(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 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 and (ii) recognition of certain revenue associated with products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.

The increase in billings was mainly attributable to increased billings in the Retail ($0.8 million) and Professional ($0.2 million) markets, partially offset by decreased billings in the Pharmaceutical Manufacturer ($0.4 million) market. The increase in Retail billings was due mainly to increased order activity for unused medication solutions, including the MedSafe. The increase in Professional market billings reflected organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery System™ and the Company’s route-based pick-up services. The decrease in Pharmaceutical Manufacturer billings was due to timing of inventory builds for patient support programs. Billings for Mailbacks, which represented 47.1% of total billings, decreased 11.3% to $4.3 million as compared to $4.8 million in the prior year period primarily related to the decrease in billings for the Pharmaceutical Manufacturer market. Billings for Route-Based Pickup Services increased 15.1% to $1.9 million as compared to $1.6 million in the prior year period and represented 20.7% of total billings. Billings for Unused Medications increased 111.3% to $1.8 million as compared to $0.9 million in the prior year period and represented 20.1% of total billings.

Cost of revenues for the three months ended March 31, 2018 of $7.1 million was 75.6% of revenues. Cost of revenues for the three months ended March 31, 2017 of $6.2 million was 72.6% of revenues. The gross margin for the three months ended March 31, 2018 of 24.4% decreased compared to the gross margin for the three months ended March 31, 2017 of 27.4%. Gross margin was adversely impacted in the third quarter of fiscal year 2018 by unplanned incremental costs associated with the Company’s treatment facility and route based operations in the Northeast related to severe winter storms. The gross margin also reflects a lower margin on unused medication collection receptacles related to the launch of a major new program.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2018 and 2017 were consistent at $2.8 million.

The Company reported an operating loss of $0.7 million for the three months ended March 31, 2018 compared to an operating loss of $0.6 million for the three months ended March 31, 2017. Operating loss increased primarily due to lower gross margin (discussed above).

The Company reported a loss before income taxes of $0.7 million for the three months ended March 31, 2018 and 2017.

The Company’s effective tax rate for the three months ended March 31, 2018 was 4.4% reflecting income tax expense related to the tax deductibility of goodwill amortization of $32 thousand. No income tax expense was recorded for the three months ended March 31, 2017 as it was not material due to the valuation allowance and net operating losses.

The Company reported a net loss of $0.8 million for the three months ended March 31, 2018 compared to net loss of $0.7 million for the three months ended March 31, 2017. Net loss increased due to the change in the operating loss and tax expense (discussed above).

The Company reported basic and diluted loss per share of $(0.05) for the three months ended March 31, 2018 versus basic and diluted loss per share of $(0.04) for the three months ended March 31, 2017. Basic and diluted loss per share increased due to the change in net loss (discussed above).

NINE MONTHS ENDED MARCH 31, 2018 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2017

Total revenues for the nine months ended March 31, 2018 of $30.2 million increased by $2.4 million, or 8.6%, over the total revenues for the nine months ended March 31, 2017 of $27.8 million. The increase in revenue is mainly due to increased billings across the Retail, Professional, Environmental, Government and Home Health Care markets partially offset by decreased billings in the Pharmaceutical Manufacturer market. The components of billings by market are as follows (in thousands):



	Nine-Months Ended March 31,
	(Unaudited)
	2018		2017		Variance
BILLINGS BY MARKET:
Professional	$	9,634	$	8,817	$	817
Home Health Care	5,987		5,760		227
Retail	5,621		4,507		1,114
Pharmaceutical Manufacturer	3,972		4,568		(596		)
Assisted Living	1,882		1,789		93
Government	1,484		1,245		239
Environmental	815		291		524
Other	636		567		69
Subtotal	30,031		27,544		2,487
GAAP Adjustment *	198		282		(84		)
Revenue Reported	$	30,229	$	27,826	$	2,403

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



	Nine-Months Ended March 31,
	2018		% Total		2017		% Total
BILLINGS BY SOLUTION:
Mailbacks	$	16,420	54.7	%	$	17,379	63.1	%
Route-based pickup services	5,479		18.2	%	4,686		17.0	%
Unused medications	4,321		14.4	%	2,400		8.7	%
Third party treatment services	815		2.7	%	291		1.1	%
Other ⁽¹⁾	2,996		10.0	%	2,788		10.1	%
Total billings	$	30,031	100.0	%	$	27,544	100.0	%
GAAP adjustment ⁽²⁾	198				282
Revenue reported	$	30,229			$	27,826


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

(2)

The increase in billings was mainly due to an increase in the Retail ($1.1 million), Professional ($0.8 million), Environmental ($0.5 million), Government ($0.2 million) and Home Health Care ($0.2 million) markets, partially offset by a decrease in the Pharmaceutical Manufacturer ($0.6 million) market. The increase in Retail billings was due mainly to increased order activity for unused medication solutions, including the MedSafe. The increase in Professional market billings reflected organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery System™ and the Company’s route-based pick-up services. The increase in Environmental billings was due to higher third party treatment billings from our treatment facilities in Texas and Pennsylvania. The increase in Government billings was due primarily to billings for unused medication related orders. Home Health Care billings increased due to the timing of distributor purchases. The decrease in Pharmaceutical Manufacturer billings was mainly due to timing of inventory builds for patient support programs. Billings for Mailbacks, which represented 54.7% of total billings, decreased 5.5% to $16.4 million as compared to $17.4 million in the prior year period primarily related to the decrease in billings for the Pharmaceutical Manufacturer market. Billings for Route-Based Pickup Services increased 16.9% to $5.5 million as compared to $4.7 million in the prior year period and represented 18.2% of total billings. Billings for Unused Medications increased 80.0% to $4.3 million as compared to $2.4 million in the prior year period and represented 14.4% of total billings.

Cost of revenues for the nine months ended March 31, 2018 of $21.8 million was 72.0% of revenues. Cost of revenues for the nine months ended March 31, 2017 of $19.6 million was 70.5% of revenues. The gross margin for the nine months ended March 31, 2018 of 28.0% decreased compared to the gross margin for the nine months ended March 31, 2017 of 29.5%. Gross margin was adversely impacted for the nine months ended March 31, 2018 by unplanned incremental costs associated with severe winter storms in the Northeast and the lower margin associated with the launch of a new unused medication program.

Selling, general and administrative (“SG&A”) expense for the nine months ended March 31, 2018 and 2017 was $8.3 million and $9.4 million, respectively. The nine months ended March 31, 2017 included $0.7 million of one-time acquisition-related expenses related to the Company's acquisition of Citiwaste, which closed on July 1, 2016. Without these costs, SG&A for the first nine months of fiscal 2017 was $8.7 million. The decrease in SG&A (after excluding one-time expenses) for the nine months ended March 31, 2018 of $0.3 million reflects the impact of cost savings initiatives launched in the second quarter of fiscal year 2017.

The Company reported an operating loss of $0.5 million for the nine months ended March 31, 2018 compared to an operating loss of $1.8 million for the nine months ended March 31, 2017. Operating loss decreased primarily due to higher revenue and lower SG&A costs (discussed above).

The Company reported loss before income taxes of $0.6 million for the nine months ended March 31, 2018 versus loss before income taxes of $1.9 million for the nine months ended March 31, 2017. Loss before income taxes decreased due to the change in operating loss (discussed above).

The Company’s effective tax rate for the nine months ended March 31, 2018 was (5.1)% reflecting the impact of the 2017 tax law change on the Company's alternative minimum tax credits of $38,000 net of estimated state income tax expense of $10,000. The benefit recorded of $38,000 represents the net benefit of remeasuring the deferred tax assets for recoverable alternative minimum tax credits offset by deferred tax liabilities related to indefinite lived assets, such as goodwill, which cannot be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets. No income tax expense was recorded for the nine months ended March 31, 2017 as it was not material due to the valuation allowance and net operating losses.

The Company reported a net loss of $0.5 million for the nine months ended March 31, 2018 compared to net loss of $1.9 million for the nine months ended March 31, 2017. Net loss decreased due to the change in the operating loss (discussed above).

The Company reported basic and diluted loss per share of $(0.03) for the nine months ended March 31, 2018 versus basic and diluted loss per share of $(0.12) for the nine months ended March 31, 2017. Basic and diluted loss per share decreased due to the change in net loss (discussed above).

PROSPECTS FOR THE FUTURE

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, assisted living/long-term care, retail pharmacies and clinics, and the professional market which is comprised of physicians, dentists, surgery centers and veterinary practices. These markets require cost-effective services for managing medical, pharmaceutical and hazardous waste.

The Company believes its growth opportunities are supported by the following:

•

A large professional market that consists of dentists, veterinarians, clinics, private practice physicians, urgent care facilities, ambulatory surgical centers and other healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from two directions: (i) field sales which focus 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 and (ii) inside and online sales which focus on the individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/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 about 155 million people or 48% of the U.S. population.

•

In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and 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 twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. The Company directly serves more than 10,300 customer locations with route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service are integrated into the offering.

•

The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2012 Population Estimates and National Projections, one out of five Americans will be 65 years or older by 2030, which will increase the need for cost-effective medical waste management solutions, especially in the long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, 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"), 38.5% of adults received a flu shot and 28.2% of flu shots for adults were administered in a retail clinic. Over the flu seasons from 2011 to 2014, the growth in the Retail flu business for Sharps was between 24% and 36%. In the 2015 flu season, the Company's flu business decreased 13% due to a mild flu season but increased 10% for the 2016 flu season. Despite the decrease in Retail flu business for fiscal year 2017 of 15% due to a mild flu season and the loss of one retail pharmacy customer, 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 assisted living and hospice to address a long standing issue within long-term care.

•

Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste — the Company's 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.

•

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 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).


•	The Company’s strong financial position with a cash balance of $5.5 million, debt of $2.2 million and additional availability under the Credit Agreement as of March 31, 2018.

LIQUIDITY AND CAPITAL RESOURCES

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 and cash equivalents increased by $0.8 million to $5.5 million at March 31, 2018 from $4.7 million at June 30, 2017 due to the following:


•	Cash Flows from Operating Activities - Working capital decreased by $0.1 million to $10.4 million at March 31, 2018 from $10.5 million at June 30, 2017. The decrease in working capital is primarily attributed to an increase in cash and cash equivalents offset by:


•	a decrease in accounts receivable of $1.5 million to $6.1 million at March 31, 2018 from $7.6 million at June 30, 2017 due to timing of billings and collections.


•	a decrease in current deferred revenue of $0.3 million to $2.1 million at March 31, 2018 from $2.4 million at June 30, 2017.


•	Cash Flows used in Investing Activities - Investing activities include capital expenditures of $0.8 million for normal plant and equipment additions.


•	Cash Flows used in Financing Activities - Financing activities include repayments of debt of $0.5 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, 2018 and the year ended June 30, 2017.

Credit Facility

On March 29, 2017, the Company entered into to a credit agreement with a commercial bank (“Credit Agreement”). The Credit Agreement, which replaced the Company’s prior credit agreement, provides for a $14.0 million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and general corporate purposes and (ii) $8.0 million for acquisitions. 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 50% of eligible inventory and $3 million. Advances under the acquisition portion of the credit facility are limited to 75% of the purchase price of an acquired company and convert to a five-year term note at the time of the borrowing. Borrowings bear interest at the greater of (a) zero percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5%. The LIBOR Margin may increase to as high as 3.0% depending on the Company’s cash flow leverage ratio. The interest rate as of March 31, 2018 was approximately 4.25%. The Company pays a fee of 0.25% per annum on the unused amount of credit facility. At March 31, 2018, $2.1 million was outstanding related to the acquisition portion of the credit facility and $41,000 related to the unsecured note payable assumed in acquisition. No amounts were outstanding under the working capital portion of the credit facility at March 31, 2018.

The Company has availability under the Credit Agreement of approximately $11.8 million ($6.0 million for the working capital and $5.8 million for the acquisitions) as of March 31, 2018. The Company also had $40,000 in letters of credit outstanding as of March 31, 2018.

Management believes that the Company’s current cash resources (cash on hand) will be sufficient to fund operations for the twelve months ending April 30, 2019.

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, 2017, as filed with the SEC. There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.

RECENTLY ISSUED ACCOUNTING STANDARDS

uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a full retrospective approach or a modified retrospective approach to implement the standard. The guidance is effective for annual reporting periods beginning after December 15, 2017 (effective July 1, 2018 for the Company). The Company initiated a project to evaluate the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures, which included identifying the material revenues streams and reviewing a representative sample of contracts. The Company is still in process of finalizing its evaluation, but has identified that for mailback and unused medication solutions, under the new guidance, the Company will recognize revenue over two performance obligations rather than the three separate elements under the current guidance. The Company is still evaluating the quantitative impact to the amount and timing of revenue recognition for the change to the identified performance obligations for the mailback solution. The Company is still evaluating the impact of the new standard on route-based pick up solution. No material changes to the amount and timing of revenue recognition over the third party treatment and other solutions are expected. The Company expects to adopt the standard using the modified retrospective approach, which involves retrospectively adopting the standard by recording a cumulative effect adjustment to all uncompleted contracts at July 1, 2018. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure. The Company conducted an evaluation (the “Evaluation”), under the supervision and with the participation of the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of March 31, 2018, pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon this Evaluation, the CEO and CFO concluded that our Disclosure Controls were effective as of March 31, 2018.

Changes in Internal Control

During the three months ended March 31, 2018, there were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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 currently pending matters will not 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, 2017 for the Company’s risk factors. During the period ended March 31, 2018, 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 3, 2018	By: /s/ DAVID P. TUSA
	David P. Tusa
	Chief Executive Officer and President
	(Principal Executive Officer)



Dated: May 3, 2018	By: /s/ DIANA P. DIAZ
	Diana P. Diaz
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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Sharps Compliance (SMED) 10-Q2018 Q3 Quarterly report

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