Customer billings, which the company believes is an appropriate measure of performance and progress of the business, decreased 14.4% to $3.2 million for the second quarter of fiscal 2009, compared with $3.8 million in the same period the prior fiscal year. The decrease in revenue and customer billings for the quarter is primarily due to timing associated with the vendor management inventory programs the company provides to pharmaceutical manufacturers. For the six-month period ended December 31, 2008, revenue increased $497 thousand to $7.6 million, compared with the first six months of fiscal 2008. Year-to-date customer billings were $7.9 million in fiscal 2009 and $7.4 million in fiscal 2008, an increase of 7.2%. The increase in year-to-date revenue and customer billings was primarily driven by strong growth in the pharmaceutical, retail and professional markets.

Burton J. Kunik, Chairman and Chief Executive Officer of Sharps Compliance, commented, “Our efforts to move from being a provider of products and services to a comprehensive solutions provider of medical waste management systems is being realized by our recent pharmaceutical and government contracts. Although this last quarter does not demonstrate our earnings power, with the addition of our government contract and continued growth in the pharmaceutical manufacturing business, we believe consolidated gross margins could exceed 50% beginning in the fourth quarter of fiscal year 2009 pending June 30, 2009.”

$40 million U.S. Government Contract Award

The company recently announced it had been awarded a contract to provide its Sharps Medical Waste Management System (“Sharps®MWMS™”) to an agency of the United States Government.

The total contract is valued at around $40 million and is expected to be executed over a five year period. The company has received a purchase order for $28.5 million which represents product and services to be provided during the first contract year. The following four option years represent payment for program maintenance.

Sales and Billings Growth

Customer billings from contracts with pharmaceutical manufacturers increased to $1.0 million in the sixmonths ended December 31, 2008 compared with $498 thousand in the same period the prior year. The recently announced renewal of the company’s first vendor managed inventory program for a top ten pharmaceutical manufacturer’s patient support program contributed around $700 thousand in billings in the first quarter of fiscal 2009 and is expected to generate an additional $900 thousand in billings during the fourth quarter of fiscal 2009 ending June 30, 2009. Billings to additional pharmaceutical manufacturers contributed around $300 thousand to the quarter ended December 31, 2008.

Sharps’ vendor managed inventory program includes the direct fulfillment of the Sharps Disposal By Mail System to the pharmaceutical manufacturers’ self-injecting patient support program participants, who use the product as a convenient means of disposing of used syringes. Sharp’s proprietary SharpsTracer system tracks the return of the Sharps Disposal By Mail System by the patient to the treatment facility, where the package is scanned and weighed prior to destruction. This data is electronically transmitted to the pharmaceutical manufacturer which assists them in monitoring drug usage and provides them with a touch point for individual patient follow-up.

Customer billings to retail market customers increased 29.5% to $1.3 million in the first half of fiscal 2009 as a result of strong seasonal demand for the Sharps disposal by mail systems as pharmacies and clinics in retail settings administer flu shots to their customers. Higher customer billings to the professional and commercial markets were offset by decreased billings to healthcare and hospitality customers.

Second Quarter Fiscal 2009 Operating Performance

Gross margin was 38.2% in the second quarter of fiscal 2009 and 41.1% for the fiscal year-to-date period ended December 31, 2008. Gross margins for the quarter were adversely impacted by the effect of lower revenue, increased operations infrastructure costs as the company prepared for higher volume including that related to the recent $40 million US Government contract and the mix of product sold (i.e., lower percentage of higher margin mailback business). For the fiscal year-to-date period, gross margins were down from the prior year as a result of around $200 thousand in excess air freight shipping costs that were incurred in the first quarter ended September 30, 2008 to address supply and manufacturing issues associated with the company’s Pitch-It IV Poles and increased operations infrastructure costs as the company prepared for the higher volume including that related to the recent U.S. Government contract.

Selling, general and administrative (SG&A) expense was $1.4 million for the second quarter of fiscal year 2009, an increase of $253 thousand, or 21% over the corresponding period of the prior year. For the six-months ended December 31, 2008, SG&A expense was $2.6 million compared with $2.3 million for the corresponding period of the prior year, an increase of 11%. The increase in the SG&A for both the second quarter and fiscal year-to-date periods was a result of increased non-cash 123R stockbased compensation expense, professional fees, recruiting and compensation-related expenses.

Kunik continued, “We invested heavily in our organization as we developed the systems and processes necessary to address the expected and rapid increase in top line growth. The operating leverage inherent in our business model will become even more evident as the company’s top line grows significantly while our SG&A expense increases at a much lower pace.”

Operating loss for the second quarter of fiscal 2009 was $232 thousand, compared with operating income of $354 thousand in the second quarter of fiscal 2008. Operating income for the six-months ended December 31, 2008 was $377 thousand, or 5% of sales, a decrease of $198 thousand compared with operating income of $575 thousand, or 8% of sales, in the same period the prior fiscal year period. The reduction in operating income was primarily due to the increases in SG&A, as noted above.

During the quarter ended December 31, 2008, the company evaluated its deferred tax asset valuation allowance and determined that such valuation allowance should be reduced to zero. As a result of this decision, the company’s balance sheet reflects deferred tax assets of $3.1 million at December 31, 2008. Additionally, the company recorded a corresponding income tax benefit of $1.8 million, or $0.13 per diluted share, and an increase to additional paid in capital of $1.3 million during the quarter ended December 31, 2008.

Liquidity and Balance Sheet Strength

Cash and cash equivalents were $2.1 million at December 31, 2008, up from $2.0 million at June 30, 2008. At December 31, 2008, stockholders’ equity and total assets were $6.8 million and $9.5 million, respectively, up from $2.9 million and $5.7 million at June 30, 2008, respectively. Although Sharps maintains a $2.5 million line of credit with JPMorgan Chase, no amounts were outstanding at June 30, 2008. The line of credit is available to finance working capital, expansion and/or potential acquisition opportunities. The company has completed negotiations and received a favorable term sheet from the Bank to increase its line of credit from $2.5 to $4.5 million. While no assurances can be made, the company believes it should have its new line of credit in place by the end of February 2009.