Sharps Compliance Corp.
Q4 2020 Earnings Call Transcript
Published:
- Operator:
- Greetings, and welcome to the Sharps Compliance Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Belodeau of IMS Investor Relations. Thank you. You may begin.
- Jennifer Belodeau:
- Thank you. Good morning, and welcome to the Sharps Compliance fourth quarter fiscal 2020 earnings call. On the call today, we have David P. Tusa, the Company's President and Chief Executive Officer; Diana P. Diaz, Vice President and Chief Financial Officer. David will review the Company's business performance, operations, and growth strategies, while Diana will review the financials. Immediately following their formal remarks, we will take questions from our call participants. As you're aware, we may make some forward-looking statements during the formal presentation and in the question-and-answer portion of this teleconference. These statements apply to future events, which are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from where we are today. These factors are outlined in our earnings release, as well as in documents filed by the Company with the Securities and Exchange Commission. These can be found at our website or at sec.gov. So with that out of the way, let me turn the call over to David to begin the review and discussion. David, go ahead.
- David Tusa:
- Great. Thank you, Jen. Good morning, and welcome, everyone, to our fourth quarter fiscal year 2020 earnings conference call. Despite what remains a challenging environment, as the U.S. continues to contend with the public health and economic impact associated with COVID-19, Sharps delivered a solid fourth quarter performance with revenue growth, improved margins, while also achieving increased operating income and EBITDA. Customer billings increased 6% and we saw growth across all of our key solutions, the mailbacks route-based business and unused medication, and we believe our performance during these unprecedented times demonstrates the ability to operate on an uninterrupted basis, but it also illustrates our strength of our strategy, and finally, the power of our diversified business model, which is transforming from a mailback company to a comprehensive service provider. While Diana will provide more details on the financial highlights for you in a few minutes, I'm going to discuss the broader view of what we believe to be significant opportunities ahead of us and the strategic investments we are making in the business to fully take advantage of the opportunity. So first, there's a seasonal flu immunization opportunity, and our focus on capitalizing what experts believe will be a very strong flu vaccine season. This belief is driven by the need to protect Americans from contracting the seasonal flu and further taxing our stretched healthcare systems. Additionally, the mixture of the seasonal flu and COVID-19 could worsen the current public health crisis. Therefore, the CDC and others are strongly encouraging Americans to get a seasonal flu shot and to get it early. Prior to this year, an estimated 45% of adult Americans received a seasonal flu immunization. We estimate about 40% of these were administered in a retail setting, like a drugstore or grocery store. In our current public health situation, with consumers focused more on health risk, experts believe a greater percentage of the population will receive the flu vaccination this year. Experts also believe the public sees the retail clinic setting as very convenient, efficient, and safe. And as many of you are aware, we provide medical waste management services to about 70% of the retail clinics, grocery stores, and the like. Further supporting our belief that we're in store for a potentially strong flu immunization season are the opening orders from our flu customers. We shipped in the June 2020 quarter about 3.6 million worth of flu related orders, and that's 70% higher than the prior year June quarter of 2.1 million. Now, the second opportunity. COVID-19 vaccine experts believe that potential COVID-19 vaccine will be the solution to the current pandemic. Further, they expect the vaccine, when available, will be administered in two initial injections 30 days apart with subsequent boosters to ensure maximum strength, immunity, and efficacy of the vaccine. The frequency of follow-on COVID shots can be determined by not only the effectiveness of the vaccine, but also the immune response. Like seasonal flu shots, experts believe that the retail clinic setting should play a key role in the efficient, effective, and safe administration of immunizations, such as flu, COVID-19, and otherwise. With our estimated 70% coverage of the retail clinics administering immunizations, we see this as a significant growth opportunity. And most importantly, we're proud to be part of the solution, supporting efforts in this country to help solve the COVID-19 pandemic. So what does this mean? What does all this mean to us as a company? What it means is that historically, our seasonal flow, which impacts our June, September, and December quarters, historically generates about $8 million in customer billing. Now, that historical revenue could then be followed by a potential COVID-19 vaccine administration season, so Americans could receive COVID-19 vaccines in addition to the seasonal flu. So we are preparing for what could be obviously a very strong seasonal flu and COVID-19 vaccine seasons. And the third opportunity, our expanded route-based infrastructure, we really don't want to minimize this during this time, but it now spans 32 states or 70% of the population. And in addition to facilitating our ability to service larger route-based prospects, the route-based business was critical to the near doubling of the customer billings in the assisted living market for the June 2020 quarter. We believe the expanded route-based infrastructure will be an important part of growing our core medical waste management business outside of the mailback business. Although we're excited about the prospects of the strong flow in COVID-19 immunization season, we've not lost sight of growing our core medical waste management business. In fact, it's a significant focus of the organization and the sales team. Now, with these opportunities, we create strategic investment opportunities in the business as follows. As we disclosed in March of this year, we significantly increased manufacturing and inventory of medical waste mailback and ship back solutions to ensure we remain well positioned to meet the anticipated increased customer demand related to the seasonal flow and the potential COVID-19 vaccine. So what this means is that we are building three times to four times as many mailbacks through calendar year 2020, as we sold in the entire calendar year of 2019. We've advised our customers, prospects in the industry that we're more than ready to service all their medical waste management needs, as the country addresses what appears to be a strong flow and potential COVID-19 vaccine season. Secondly, as we also disclosed in March of 2020, we're significantly expanding our medical waste treatment capacity. We recently commissioned our new autoclave in the Texas facility, expanding our overall medical waste processing capacity from 10 million to 18 million pounds a year. The additional autoclave in Texas was part of an overall expansion of that facility that we started back in October of 2019. We also expect an additional autoclave at our Pennsylvania facility that should be completed and operational by October of 2020. Now, with the addition of the Pennsylvania additional autoclave, this will increase our medical waste processing capacity to 27 million pounds a year, which essentially tripled our capacity. As a reference point, we processed about seven million pounds of medical waste in the calendar year 2019. The capital costs to triple our treatment capacity is about $800,000, and that's about $400,000 each for the autoclave. We think this $800,000 investment is not only very prudent, but also important to our ability to properly and efficiently treat the expected increases in medical waste process, while at the same time, building valuable permitted growth infrastructure. Third, we continue to invest in our route-based service and infrastructure, which now serves 32 states or reaches about 70% of the population. It's important to understand that our expanded route-based footprint with them, we're now able to directly pick up medical waste from more customers in more locations and more frequently. This is an important capability that allows us to pitch and land larger route-based prospects that we were not able to be able to service when we had a smaller infrastructure. The pipeline of opportunities is quite full, and we're bullish in our ability to close deals and increase route-based revenue, while in proving route density and profitability. So now, let's move to unused medications. We continue to see opportunities for our unused medication solutions to the MedSafe and the TakeAway medication envelopes. We believe we're the leader in this industry. We now have over 5,500 MedSafe collection receptacles deployed with our customers, and we process over 58,000 returned MedSafe liners as of today. We believe our leadership position and the continued need for proper disposal of unused medication, including controlled substances, drove the 32% increase in unused medication business for the fiscal year 2020 versus the prior fiscal year. Although the return of the MedSafe liners dipped a bit in the June quarter, the returns are now at or above pre-COVID-19 levels in July, [Technical Difficulty] which supports the view that customers are returning to the retail pharmacy as they focus on their health. An added benefit of this is believed to be a very positive development in terms of the upcoming immunization seasons, where these customers could again potentially be looking to retail pharmacies as a safe and convenient venue to receive healthcare, rather than visiting a doctor's office while the COVID-19 environment persists. This is a very exciting time for the Company. We're energized by the opportunities we see in the marketplace and by what we believe to be our meaningful role addressing and helping solve concerns surrounding the current pandemic. We positioned the Company as a cost-effective, and efficient, and reliable, comprehensive provider of medical waste management solutions. We're also focusing on supporting the needs of our customers, while also growing our leadership position. Now, I'm going to turn it over to Diana, who's going to cover the financials. And then we'll have Q&Q, and then after Q&A, I'll make a few closing remarks. Diana?
- Diana Diaz:
- Thank you, David. Our fourth quarter fiscal 2020 revenue increased 3% to $12.6 million, as compared to $12.2 million in the fourth quarter of fiscal 2019. GAAP revenue was adversely impacted by a higher than expected net revenue deferral of $1 million for the June 2020 quarter, compared to $500,000 in the prior year. This $500,000 increase is what we refer to as the GAAP adjustment, which was caused primarily due to the slowdown during the June 2020 quarter of returned mailbacks, which adversely impacts revenue recognition. That means this reduces GAAP revenue. Looking at the trends in July and August, we've seen an increase in returned mailbacks by about 30%. It's important to note that this GAAP adjustment is not lost revenue, it's rather revenue deferred to future periods, which we would expect to see primarily in the September and December 2020 quarters. The fourth quarter increase in billings was led by a $1.9 million or 54% increase in the retail market, near doubling of the assisted living market customer billings to $1.3 million. Included in the $1.9 million increase in retail market billings is $1.5 million related to our flu shot business. Our professional market billings were down $660,000 or 17% to $3.3 million in the fourth quarter of fiscal 2020 compared to the prior year. The decrease in this professional market, which is comprised of physicians, clinics, dentists, surgery centers, labs, veterinarians, and other healthcare providers, was primarily related to mandated closures associated with the COVID-19 pandemic that temporarily closed some of our dental, physician, and other customer facilities. About half of this decrease impacted our route-based business and the other half impacted our medical waste mailbacks. Most of the affected customers that had temporary closures have since reopened. As we stated publicly, we expected a reduction in our professional market billings for the June quarter, with a temporary closure of a number of our customers, including dental and various physician practices, resulting from the impact of COVID-19. We also stated that we believed these decreases should be offset by increased revenue from the assisted living sector, as that industry generated much higher volumes of materials classified as medical waste. As you can see from today's release, this is exactly what happened. The good news is, is that we've seen the reopening of the vast majority of our temporarily closed customer locations and continue to see strength in the long-term care billings in July and August 2020. Additionally, and based on what we see in the July and August numbers, we expect a bounce back in the professional market billings in the September 2020 quarter. Route-based pickup billings for the fourth quarter of fiscal 2020 of $2.6 million are up 3% compared to the prior year quarter, and contributed 19% of total billings for the quarter. The quarterly billings were positively impacted by increased billing in the long-term care market of about $200,000 and adversely impacted by reduced billings in the professional market of approximately $300,000. Based on the trends we see in July and August of 2020, we believe that route-based billings for the September 2020 quarter should be in the range of $2.8 million to $2.9 million. Now, onto the unused medication billings. Our billings for this area were $2.3 million, up 5% compared to $2.2 million in the prior year quarter, and contributed 17% of total billings for the quarter. Out of the 5,250 MedSafes deployed as of June 30, 2020, about 550 were installed during the June 2020 quarter. MedSafes deployed as of June 30, 2019 the last fiscal year were 3,600 units, with 450 units deployed in the quarter ended June 30, 2019. Additionally, MedSafes deployed during the sequential quarter ended March 31, 2020 were about 230 units. As of June 30, 2020, we have processed about 55,000 MedSafe liners, which is 22,500 or 41% higher than the 32,500 processed as of June 30, 2019 at the end of last fiscal year. For the June 2020 quarter, we processed 4,700 liners versus 6,800 processed for the sequential quarter ended March 2020, and compared to the prior year June quarter of 4,900 liners. Mailback billings of $7.2 million increased 5% and contributed 53% of total billings for the quarter. This $340,000 increase in mailback revenue was led by the $1.5 million increase in flu-related mailback business, partially offset by an almost $900,000 decrease in pharmaceutical manufacturer market mailback orders and a decrease in mailbacks sold to the professional market of about $300,000. Remember that orders in the pharmaceutical manufacturer market are lumpy, and we believe a better way to look at this market is on a trailing 12-month basis, which showed an increase of 12% for the pharmaceutical manufacturer market for fiscal 2020 over the prior year. Gross margin for the fourth quarter increased to 33%, as compared to gross margin of 32% in the fourth quarter of fiscal 2019. SG&A expense increased 7% to $3.3 million, or 26% of revenue for the fourth quarter of fiscal 2020, compared to SG&A of $3.1 million or 26% of revenue in the same prior quarter. The increased SG&A is related to the Company's continued investment in sales and marketing. We see SG&A increasing by approximately 11% to 13% for fiscal year 2021, reflecting increased headcount and related costs, as well as additional sales and marketing expense. Sharps reported operating income of $700,000 in the fourth quarter of 2020, compared to operating income of $600,000 in the fourth quarter of last year. The Company recorded a $1.7 million or $0.10 per share income tax benefit, as a result of the release of the valuation allowance on the basis of our reassessment of the recoverability of our deferred tax assets. More simply said, the $1.7 million represents the recognition of previously unrecognized GAAP tax benefits associated with prior year GAAP losses. Going forward, and beginning with the September 2020 quarter, our GAAP financials will reflect income tax expense of about 26% of pre-tax income, including both federal and state income taxes. Sharps reported net income of $2.2 million, or $0.13 per basic and diluted share this quarter, compared to net income of $500,000 or $0.03 per basic and diluted share in the fourth quarter of last year. The Company generated EBITDA of $1 million in the fourth quarter of fiscal 2020, which is consistent with EBITDA in the same period of fiscal 2019. Now, let's look at the key comparisons for the full year of fiscal 2020. Revenue increased 15% to $51.1 million, and customer billings increased 18% to $53 million. Retail billings increased 40% to $16 million, due primarily to an increase in billings for flu shot related orders of $2.2 million, as well as an increase in unused medication solutions, including the MedSafe, the TakeAway medication recovery system envelopes of $2 million. Home healthcare billings grew 27% to $9.9 million. Pharmaceutical manufacturer billings increased 12% [ph] to $4.7 million, and professional market billings increased 4% to $15.6 million. Gross margin increased slightly to 31% for fiscal 2020, as compared to 30% in fiscal 2019. SG&A increased 17% to $14 million, compared to $12 million in fiscal 2019. That increase was related to our continued investments in sales and marketing, but was consistent with the prior year as a percentage of sales at 27%. The Company recorded operating income of $900,000 in fiscal 2020, as compared to operating income of $400,000 in fiscal '19. The Company's income taxes for fiscal year 2020 included that $1.7 million or $0.10 per share income tax benefit as a result of the release of the valuation allowance that I described previously. Net income for fiscal 2020 was $2.3 million or $0.14 per basic and diluted share, compared to net income of $200,000 or $0.01 per basic and diluted share for last year. The Company generated EBITDA of $2.4 million for the fiscal year 2020, which was an increase of 14% over last year. Our balance sheet remains solid, with $5.4 million of cash at June 30, 2020, and working capital of $11.1 million. Accounts receivable at June 30, 2020 was $11.8 million. Our days sales outstanding or DSO, using the month of June's revenue, was 56 days, reflecting disproportionately higher billings in the month of June 2020, compared to other months in the quarter. Inventory at June 30, 2020, including both current and long-term portions, was $6.7 million, an increase of $1.9 million over the prior year. Most of the increase in inventory is due to higher levels of flu-related mailback inventory and IV poles, which increased $900,000 and $500,000, respectively, over the same period. Property, plant and equipment increased $3.3 million from June 30, 2019 to June 30, 2020, and that includes a spend of about $2.9 million in the current year on the expansion of our treatment facility in Texas, which grew from 13,000 square feet to 30,500 square feet, including the cost of the new autoclave. Our long-term debt increased $3.7 million from the end of last year to the end of this year, due to borrowings of $2 million to fund the Texas treatment facility expansion, plus the funds that we drew from the PPP loan of $2.2 million, partially offset by repayment of our prior year's acquisition debt of $500,000. As we previously announced, we did receive $2.2 million under the Paycheck Protection Program, or PPP, established as part of the CARES Act, and we're in the process of applying for the forgiveness of this loan will be our lender, under the guidance provided by the Small Business Administration and the Department of Treasury. And with that, I'll turn the call back over to David.
- David Tusa:
- Great. Thanks, Diana. Operator, let's go ahead and open it up for the A&A. And after the Q&A, I'm going to make a few closing remarks.
- Operator:
- Thank you. We will now be conducted a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from line of Gerry Sweeney with ROTH Capital. Please proceed with your question.
- Gerry Sweeney:
- Good morning, Diana and David. Thanks for taking my call.
- David Tusa:
- You bet. Good morning.
- Gerry Sweeney:
- I wanted to start with mailback. Obviously, the flu season, the rubber is going to be hitting the road in the next couple of weeks. CDC marketing. I think some of the retail pharmacies are going to start marketing. But we've been doing a little bit of work in this area, and we know -- and I want to just get a little bit more information on some of the stats and feedback you're getting from your customers. As you discussed in your prepared remarks, I think 45% of adults have gotten flu shots in the past. 40% of this is in the retail settings. Just want to see what your customers are saying about maybe a shift in where this is going to be taking place. I know the CDC is a apparently holding some calls and conferences this week, talking with some retail pharmacies about administering or shifting some of the inoculations to different locations, satellite locations, at least for the flu side, and using this maybe as a test for COVID vaccines. What are your customers saying about just the shift, at least potential shift? And are there more opportunities for them? I also understand some retail pharmacies are partnering with schools to provide clinics, etcetera, as well. So just want to get some thoughts there. I know a long-winded question there, butβ¦
- David Tusa:
- No, that's a good -- that's actually a very good question. Obviously, we're in close contact with all of our customers, and they do expect a significant or very busy flow. I'd just say, from our standpoint, and then listening to them, first of all, from everything we've seen, I think that the vaccines that are being manufactured are, I don't know, 20% to 25% higher than the prior year. I think that will really impact us, assuming that it happens, is I think there's a real chance that the percentage of shots administered in a retail setting could go -- what were they, Diana, last year? They were 40%, roughly 40%. I can remember not too long ago when they were 15% or 20%. But I will tell you what we're doing because to be ready -- and we have assured them that we're ready for however large the seasonal flu is, we're -- just for the seasonal flu alone, we're building at least 50% more mailbacks than what we sold last year in 2019 to be prepared. I'm not saying it's going to increase 50%. I'm just saying we're going to be ready for that. But if you look at a lot of the data and what the experts are saying, I think it's pretty easy to say that 20%, 25% should be achieved. But you're exactly right with your observations and that they're partnering with a number of different groups, and whether it's schools, or universities, or our community. So they're going to be very, very active in the administration of the seasonal flu.
- Gerry Sweeney:
- You gave us some details on some of the mailback units I think shipped in the June quarter. Could you give us any detail on the carry -- well, one, the carryover into July and August or, as a caveat to that, when would you expect to start to see some carryover when it comes to shipping?
- David Tusa:
- Right. So, first of all, they started administering flu shots a couple of weeks ago. I know some of the larger chains have been starting on the flu shots. The business has always worked, and I think it's going to work this way as well, as we get the large upfront orders in the June quarter and then we have follow on, and the follow-on orders are usually sometime in September. And what they're doing is replenishing the warehouse, the distribution warehouse, for our customer, because hopefully, all the mailbacks that we shipped to them originally have been sent out or being used by the retail pharmacy. So, we probably won't have a good idea on that until sometime in September what the follow-on would be. And then again, depending on the strength of the flu shot, as what's happened in the past, it will happen again in November, December, where they'll order again to reload their warehouses. So, we'll just have to see. We'll have a better idea of September.
- Gerry Sweeney:
- Got it. Then switching gears, and then I'll jump back in the queue, was just back to route-based. Obviously, that's one of the my core drivers in my model. But the expansion into 32 states, what does that pipeline look like? I know you said it looks deep. And looking for a little potential detail as to what's sort of percolating in there. But also, could you describe maybe the average size order and how it's changed over the last couple years, especially as you expand it? And should we continue to assume maybe some larger deals going forward because of that expansion?
- David Tusa:
- Sure. I'll tell you what we're focused on. On the field sale side, which would be driving a lot of the larger opportunities for this expanded route-based business, pipeline is quite full. There's usually at least 300 to 400 opportunities that are in that pipeline that we're actively working. I will tell you that probably the average size of the opportunities on the RMW side are probably annual opportunities of $400,000 to $500,000. So that's the type of opportunity. So if you think about it, it's opportunities with maybe 500, 700, 1,000 locations that we think were really good. And over the last year or two, as we've expanded into the route-based business, the opportunities that we've closed are growing, and they're getting larger and larger. So that's why we get really excited about it. And we strongly believe that when you're talking about national deals or very, very, very large regional deals, that we're -- it's us or Stericycle going after these opportunities. So we like where we're positioned, and we're quite excited. We have a lot of resources pointed to closing those larger opportunities.
- Gerry Sweeney:
- Got it. I appreciate it. I'll jump back in line. Thanks.
- Operator:
- Our next question comes from a line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.
- Rob Brown:
- Hi, good morning. And thanks for taking my call.
- David Tusa:
- Good morning.
- Rob Brown:
- First, I just wanted to get a little more color on the assisted living business growth. What's really been driving that and how do you see that continuing to grow?
- David Tusa:
- So in assisted living, let me see what happened during the pandemic. There's a lot of materials like the PPE, the gloves, masks, gowns. They would historically traditionally go into the solid waste, the trash. But during the pandemic, the long-term care facilities -- because they've been really hit hard, they've been disposing of those as medical waste. So the volumes have increased from existing facilities because they're treating more items as medical waste versus solid waste. So that was very strong in the June quarter. You saw roughly $600,000 increase year-over-year. It's continuing as of today. Now, we don't know how long that's going to continue, but the strength and the volume of long-term care has continued. I don't know if it continues through September, or December, or sometime next year. We don't know. But as of right now, there appears to be continued strength in that market.
- Rob Brown:
- Okay, great. Thank you. And then on the unused medicine market, you had nice growth in units in the quarter. Maybe just give a sense of how that unit growth should continue in terms of new placements for the rest of the year, or into next year. Sorry. Thank you.
- David Tusa:
- We really look at it on an annual basis, really on a calendar year basis. And I think this year alone, I know --
- Diana Diaz:
- 32% growth in the unused medication market.
- David Tusa:
- Yes, about 32%. We can't guarantee that, but you've seen some of the trends over the last couple of years. And we think we have the opportunity to continue to grow that business. I will tell you this. Retail pharmacy is still strong, and we continue to deploy MedSafes into retail. I will tell you right now though, we've seen a slowdown with new sales of the MedSafe in the long-term care market, and that's because long-term care has been heavily hit with COVID. So that could adversely affect, maybe even over the next six to 12 months, incremental sales to long-term care. But the retail side continues to be strong.
- Rob Brown:
- Okay, good. And have you said how much long-term care is a percent of that business?
- David Tusa:
- Well, I will tell you this. Roughly half of our MedSafes are retail clinic market, and the other half is split between long-term careβ¦
- Diana Diaz:
- Government.
- David Tusa:
- Government, licensed law enforcement, drug treatment facility.
- Rob Brown:
- Okay, thank you. I'll turn it over.
- Operator:
- Our next question comes from line of Michael Hoffman with Stifel. Please proceed with your question.
- Michael Hoffman:
- Hey, David and Diana. Thank you for the time today. David, where do you think your incremental margins have now settled as you exit 2020 going into '21?
- David Tusa:
- I think -- and we continue to model out, and I continue to think our incremental gross margins are going to be somewhere between 45% and 50% on a going forward basis.
- Michael Hoffman:
- Okay. And then, you gave us a framing of 50% increase on 2019 mailers. How many mailers did you deliver in 2019?
- David Tusa:
- Mailers?
- Michael Hoffman:
- For the mailback. Sorry, it's my shorthand.
- David Tusa:
- For the medical [indiscernible]?
- Michael Hoffman:
- Yes, you talked about how you increased by 50% your inventory for mailback in response to the -- versus 2019. What's that actual number look like?
- David Tusa:
- So last year 2019 for the flu business alone, we sold, I think it was 210,000 or 220,000 mailbacks for the flu season. So just for the seasonal flu, we're building well over 300,000 just for the seasonal flow. We're also continuing to build throughout calendar year 2019. We're going to build a gross of probably 600,000 to 700,000 of them to be able to be prepared for the potential COVID-19 vaccine.
- Michael Hoffman:
- Okay. We should see that inventory building up on the balance sheet gradually each quarter as we get into the calendar year '21, potentially, if we have a vaccine?
- David Tusa:
- Right. And at end of June, I think we had mailback inventory of -- what was it; $1.2 million [ph]?
- Diana Diaz:
- Correct.
- David Tusa:
- Of about $1.2 million that we had. That was 250,000 units or so at June 30 for the seasonal flu. So yes, you will continue to see that. Now of course, that will reduce hopefully, as we as we can sell them throughout the year.
- Michael Hoffman:
- Great. And then you've talked about in the past you had about approximately 13,000 route-based customers. Of that 13,000 approximate, how many aren't open percentage wise or a number?
- David Tusa:
- So we have about -- now, it's roughly about 15,000 now on the -- or high 14,000 on the route-based customers. We saw -- what was it Diana, about 1,000 of them that were temporarily impacted.
- Diana Diaz:
- Right, and all but 20% have reopened.
- David Tusa:
- So, 80% are back on.
- Michael Hoffman:
- And are the 20% things like schools and stuff like that?
- Diana Diaz:
- Yes, it just depends. Maybe the geographic location that they're in, or there were a few schools. But most of the practices, the physician practices and dentists, are back on track.
- Michael Hoffman:
- Okay. And then how was your past collections in the quarter?
- Diana Diaz:
- Cash collections are at a normal pace. We didn't see any significant impact from COVID-19 on our cash collections. Our DSO decreased as of June compared to March. So we're not seeing any issues or problems there.
- Michael Hoffman:
- So you didn't need to make any adjustments of bad debt allowance or anything like that either?
- Diana Diaz:
- Correct.
- Michael Hoffman:
- And then you have a significant shift in the debt going current. What's the plan?
- Diana Diaz:
- Okay, so our current portion of long-term debt includes $1 million related to the PPP loan, which per its terms, it requires principal payments starting in October. But we're in the process of applying for forgiveness, which when that's finalized, would remove the whole thing from the balance sheet.
- Michael Hoffman:
- Got it. Okay. And then lastly, you had about a 30% increase in contract liabilities. What's behind that?
- Diana Diaz:
- So that total increase is just over $700,000. Some of it is related to the increase in the flu shot related orders for the quarter. Remember, that increased to $1.5 million, and we had deferrals of about $300,000 additional amounts on that. Also, some increase in the contract liability is because we had delays in the mailback returns that delayed the recovery or the realization of that revenue. So that's really the explanation for that increase in the contract liability.
- Michael Hoffman:
- So we should see that walk back as the plan plays out, both the mailbacks catch up, and if we really do see more of the population get a flu shot?
- Diana Diaz:
- Correct. It'll come down as mailbacks are returned for treatment. But if we sell more stuff, it's going to go up again. So --
- Michael Hoffman:
- Okay. All right. Thank you very much.
- David Tusa:
- Thanks, Michael.
- Operator:
- Our next question comes from line of Kevin Steinke with Barrington Research. Please proceed with your question.
- Kevin Steinke:
- Hey. Good morning. You had spoken about on your last conference call in May about kind of reassessing in the June, July timeframe, your build out of mailback inventory for a potential COVID vaccine. And obviously, you talked about how significantly you've ramped up production here. But I was wondering, in that reassessment in June, July, maybe if things change from what you're thinking previously or kind of you continued on what you had originally thought prior to that.
- David Tusa:
- So we're pretty much on the same thing, and we're on track right now to build for the calendar year at least 700,000 mailbacks. And again, sold a little bit over 200,000 last year. So I think in inventory, the X inventory right now is about 250,000. Of course, that's net of what we shipped out in June. But what we do is we review it every couple of few weeks. And then for instance, when we get a further assessment in September of the follow-on flu shot related orders, we may adjust that upwards or downwards. But we just need to make sure that we have plenty of inventory, and again, roughly three times, maybe even four million times what we did last year, to be able to meet the needs of the season. If we overestimate it, that's fine. They can just be used next year. If we underestimate it, well, that's a good thing. That means we need more. We can turn the manufacturing back on pretty quickly.
- Kevin Steinke:
- Okay, and in the inventory buildup here, are you then -- in relation to the COVID vaccine, are you then preparing for kind of the multiple shots that you talked about, two initial and then boosters, what have you?
- David Tusa:
- Right. So, yes, absolutely. So, in my mind, the 700,000 or so that we're currently on track to manufacture, you probably have about 300 to 1,000 of those for the seasonal flow, and then the excess for COVID. But yes, we consider COVID potentially being larger than the seasonal flu, for two reasons. One, there's a possibility more people may get a COVID-19 vaccine than flu, and what's multiple shots and boosters for the COVID-19. But we've reviewed the inventories and the demands and what we hear of our customers on a regular basis, and we'll adjust accordingly.
- Kevin Steinke:
- Okay, great. And you had also talked about last quarter, potentially closing some deals on the route-based side, as early as July or revenue from those flowing as early as July. I mean, what's the closure rate been in the deal pipeline? Was that impacted at all or delayed at all by the pandemic? Or just kind of how is that pipeline progressing towards closure?
- David Tusa:
- Right. No, that's a good question. We did have a number of larger deals that were in progress, and yes, many of them did get slowed with COVID-19, as healthcare facilities and other types of facilities we were calling on were much more focused on COVID-19 and dealing with COVID-19. We are seeing them now reengage and get more involved in looking at us as an alternative provider. But we definitely saw slow down for a few months in our ability to sell the larger deals, and that does not mean that we stop calling on them, but we are engaged as we speak.
- Kevin Steinke:
- Okay, thanks. And then I just I found it interesting that in the press release you talked about a pickup in inside and online sales channel, due to more route-based services being sold into assisted living. I mean, I mostly thought about route-based being sold through the field sales team, but I guess maybe you can get at it as well a bit through the inside and online sales, depending on the size of the customer. Is that kind of a way to think about that?
- Diana Diaz:
- That's correct. The inside sales has a very heavy focus on increasing the route-based customers, and they've had a lot of success in adding customers over the last few months. That's a big part of our route-based growth.
- David Tusa:
- When we launched this inside sales initiative, our thought was -- and it's our mantra as of today, the inside sales team -- which is correct, by the way, that is a phenomenal job, led by Dennis and his team -- they sell everything. And if the inside sales cannot sell a mailback, or a pickup, or a MedSafe, then we don't think they're near as valuable as they are if they can sell it all. But they sell it all, and they do a great job on selling the route-based pickup, in addition to the field sales team.
- Kevin Steinke:
- Okay, great. And then you had a temporary spike in costs, as you wanted to ensure continuity of service during the pandemic. Have some of those costs started to roll off, or should we think about those kind of continuing forward?
- Diana Diaz:
- We saw those increases continue. It was about $100,000 impact in the March quarter, related to COVID-related spending. And that continued through June, and some of that goes away, starting in July.
- Kevin Steinke:
- Okay, thanks. That's all I had.
- David Tusa:
- Okay, great. Thanks, Kevin.
- Operator:
- We have reached the end of the question-and-answer session. Mr. Tusa, I would now like to turn the floor back over to you for closing comments.
- David Tusa:
- Thank you, operator. As discussed in my introduction, world events have strengthened our view that Sharps has a number of growth opportunities in the markets we serve. From our vantage point today, we believe that revenues could be favorably impacted over the next year and beyond, what experts are indicating could be continued strong flu immunization seasons, and multi-shot COVID-19 immunization efforts for several years. Now, experts believe it's possible that the current pandemic could or maybe already has morphed into more of an endemic situation, which means that COVID or similar viruses could be here to stay. So it's possible that we'll need not only seasonal flu vaccines, but also COVID type vaccines and boosters for the foreseeable future. And one last thing about the potential COVID-19 vaccine. We're all wondering when it's going to be available. And every news story, every news article is predicting when this COVID-19 vaccine will be available. Well, no one really knows, and we all have a lot of hope that it'll be sooner rather than later. But there is one thing I do know, is that we're ready. We are ready for no matter how large a seasonal flu or how large the COVID-19 vacc [ph] season is, we're ready. We're ready to meet the demands. We've assured our customers that we will have all the mailbacks and whatever else they need, so we can cost-effectively and safely collect, transport, and treat the related medical waste. And again, in addition to the near-term opportunities, we've talked a lot COVID and flue. We continue to invest heavily in unused medication and in the route-based business as part of the expansion of the Company outside of a mailback to a comprehensive service provider. I think it's worked. I think it's worked quite well. And one last thing before signing off. Our employees have worked obviously very hard during the pandemic. And because of them, we've ensured uninterrupted service to our customers, and we thank them for that. We're also going to thank them in advance for what we think is going to be a very busy 12 to 18 months going forward as we work with our customers in the potentially strong seasonal flu, coupled with helping solve the COVID-19 pandemic. So thank you very much to our employees. And again, thank you for everyone on the call today. We appreciate the questions and the support. Everyone, stay healthy and safe, and we'll talk soon.
- Operator:
- Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Other Sharps Compliance Corp. earnings call transcripts:
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