Sharps Compliance Corp.
Q3 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Welcome to Sharps Compliance Third Quarter 2015 earnings conference call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. John Nesbett of IMS. You may begin.

[John Nesbett:]

Good morning and welcome to our conference call to discuss Sharps Compliance's financial results for the third quarter fiscal 2015. On the call today, we have David Tusa, the company's President and Chief Executive Officer; Diana Diaz, Vice President and Chief Financial Officer; and Brandon Beaver, Senior VP of Sales. David will review the company's business operations and growth strategies and Diana will review the financials. Brandon will discuss the sales organization and related sales initiatives. Immediately following their formal remarks, we will take questions from our call participants. If you are listening via webcast, please note you have the ability to submit questions through the Internet. As you are 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're 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. Okay. So with that concluded, let me turn the call over to David to begin the review and discussion. Go ahead, David. The floor is yours.

[David Tusa:]

Thanks, John. Good morning, everyone and welcome to our third quarter fiscal-year 2015 earnings conference call. As most of you are aware, our third quarter is historically our slowest. This is a result of the ending of the flu shot season in the December quarter and the typically strong calendar year in orders in the pharmaceutical manufacturer market. Consistent with this, third quarter customer billings grew at 11% to $5.9 million and revenue for the quarter increased by the same percentage to $6.2 million. The quarterly increases in billings and revenue were attributable to strong growth in the government market and solid increases in the professional, pharmaceutical manufacturer and assisted living market. So let's talk a little bit more details about the individual markets. During the quarter, government billings increased by nearly 470% to $700,000. This was related to the government approval and subsequent sale of our new TakeAway Medication Recovery system envelopes and our new MedSafe solutions. Both the TakeAway envelopes and the MedSafe solution were designed to meet all of the requirements of the DEA's new Secure and Responsible Drug Disposal Act, which allows the collection, transportation and treatment of consumer dispensed unused medications. And for the first time, including controlled substances. The TakeAway envelopes have recently been approved and added to our federal supply and GSA schedules. And why this is important is that they are approved and it facilitates purchases of the solutions by government agencies. The TakeAway envelope and MedSafe have both been also added to our distribution and pricing agreement. That's commonly referred to as a DAPA and that's for purchases by the Department of Defense Agency. So what this means is that the new TakeAway envelopes and MedSafe solutions are currently in use by two major government agencies. Our professional market billings grew 42% to $1.6 million in the third quarter as we continue to roll out sales initiatives and promotional activities focusing on educating doctors, dentists, vets and other healthcare professionals about our Sharps Recovery system. We believe our mail back systems offer significant cost savings, operational efficiencies and convenience for the small quantity generator sector. Now the pharmaceutical manufacturer market grew at about 43% to $754,000 in billings for the quarter. And during the quarter, we filled an order for new inventory build for an existing customer. And we expect to launch three additional patient support programs for new drug therapies during the remainder of calendar year 2015 and through the first quarter of calendar year 2017. Once fully rolled out, these two new programs are already launched, plus the three additional new programs are expected to generate annual revenue of about $4 million or even higher. We've built a strong reputation in this market through our ability to provide innovative, customized programs for our customers and their patients. In return, they're focused on attracting new customers while also adding new programs for existing customers. The retail market. The billings actually decreased by about 17% to $610,000 in the third quarter due to the timing of orders. Probably the best way to look at this is really for the nine-month ended period. And for the nine months ended March 31, the billings in this market grew 28% to $5.7 million. As we said before, we believe this market will continue to drive long-term growth as consumers look to alternate sites to receive their flu shots and other immunizations and as retail pharmacies increase the variety and volume of the healthcare services they provide. In fact, per the CDC, 22% of flu shots for adults were administered in the retail clinic sector and this trend is expected to continue to increase. In addition to continuing the growth in the flu shot business, we believe there's also growth opportunities for more primary care in the retail or alternate site setting. A recent study showed that only 2% of all primary care encounters were administered in a retail setting. So with about 75% of penetration in the retail clinic sector, there looks to be opportunity for more growth. Now looking forward, we expect to see a strong fourth-quarter, ending June 30, 2015, driven by growth in all of our key markets, rounding out what we believe will be a solid fiscal year end. Also, we're excited about the potential positive impact on sales of our new unused medication management solutions, the TakeAway envelope and MedSafe solution. So with that, let me turn the call over to Brandon and he'll give an update on our sales initiatives. Brandon?

[Brandon Beaver:]

Thanks, David. As David mentioned, we've made some significant growth this quarter, not only in the government sector, but also with the professional and pharmaceutical manufacturer sectors. The professional market, we continue to focus on educating the market about the convenience and cost efficiency of our mail back solutions. During the quarter, we conducted inside sales initiatives and promotional activities to attract healthcare professionals from all practice areas. Additionally, our professional market growth benefited from the closing of larger professional market multilocation customers by our field sales team. These combined efforts resulted in a 42% increase in professional market billings for the quarter. Our penetration rate in this market is still very low and as such, will remain a key focus of our ongoing sales initiatives. Our relationships in the pharmaceutical manufacturer market remains strong, as our partners realize the value of our unique solution, which is not just a disposal solution for self-injecting patients in the home setting, but also an opportunity for pharma, branding and data related to patient compliance and medication adherence. The feedback we provide alerts the manufacturer if a patient is not using the drug the way they should be, giving the manufacturer a touch point opportunity back to the patients. We're enthusiastic about the opportunities we're seeing in pharma, especially as we're seeing programs for new indications in higher patient counts. As a result, we're optimistic about the long-term growth prospects for this market. While we saw a 9% increase in our assisted living market billings, we're still not where we want to be. This is a significant market opportunity for us and we continue to focus resources on closing new customer deals in calendar 2015. We continue to invest in sales, as evidenced by the increase in our sales team to a count of 21 individuals. This represents inside, field and sales support personnel. This compares to 15 sales-related employees as of January 1, 2014 and 17 as of January 1, 2015. Our pipeline of opportunity is strong and our sales team is among the strongest and most experienced in the company's history. We're intent on accelerating the closure rate for additional new business throughout calendar year 2015. In addition to the progress we're making in the government sector, we're selling the new TakeAway envelopes and MedSafe into the retail pharmacy and assisted living markets. Sales to date of the MedSafe have been to smaller chains, where they quickly realize the convenience and safety of the new DEA-approved collection receptacle. Our sales team continues to pursue MedSafe opportunities in retail, assisted living, drug treatment, hospice, law enforcement and other commercial markets. I'll turn it back to you, David.

[David Tusa:]

Thanks for the update, Brandon. Now let's turn it over to Diana, who can address the financials in a little bit more detail.

[Diana Diaz:]

Thanks, David. During the third quarter, the company recorded revenue growth of 11% to $6.2 million as compared to $5.6 million in the third quarter of last year. Gross margin was 27% in the third quarter as compared to 25% in the prior-year third quarter. The margin increase was driven by leverage gained from higher revenue. Selling, general and administrative expense increased to $2.4 million or 39% of sales as compared to $2.2 million or 40% of sales in the third quarter of last year. SG&A in the third quarter of 2015 increased - included increased sales and marketing spending as compared to the third quarter of last year. Sharps reported a net loss of $812,000 or a loss of $0.05 per basic and diluted share this quarter compared with a net loss of $935,000 or a loss of $0.06 per basic and diluted share in the third quarter of last year. Now let's look at a few highlights for the nine months ended March 31, 2015. Revenue of $21.9 million in the first nine months of fiscal 2015 was an increase of 13% compared to revenue of $19.5 million in the first nine months of fiscal 2014. Customer billings increased 15% to $22.1 million in the first nine months of fiscal 2015. Retail billings grew 28% to $5.7 million in the first nine months of the year, primarily due to increases in flu shot-related business. Sales to this market are trending upward. And while the retail market is traditionally inconsistent quarter by quarter due to the variability in demand for flu shot solutions, the expansion of healthcare services in retail pharmacies overall will drive growth for the company. Pharmaceutical manufacturer billings increased 33% to $3.4 million in the first nine months of fiscal 2015 and professional billings increased 22% to $4.7 million. Government billings increased 160% to $1 million in the first nine months of fiscal 2015 compared to the prior year. Fiscal 2015 year-to-date gross margin was 33%, which is consistent with the first 9 months of fiscal 2014. SG&A expense increased to $7.1 million in the first 9 months of the year, an increase of 6% over the prior-year period as a result of increased investment in sales and marketing initiatives. The company recorded an operating loss of $138,000 in the first 9 months of the year as compared to an operating loss of almost $700,000 in the first 9 months of fiscal 2014. EBITDA improved to $515,000 in the first 9 months of 2015 as compared to EBITDA of $150,000 in the first 9 months of last year. Net loss in the first 9 months of fiscal 2015 was $137,000 or a loss of $0.01 per basic and diluted share compared to a net loss of almost $700,000 or $0.05 per basic and diluted share in the first 9 months of last year. Our balance sheet remains solid, with $16.2 million of cash and cash equivalents at March 31, 2015, compared to $13.7 million at June 30, 2014, with no debt. At March 31, 2015, working capital, stockholders' equity and total assets were $18.2 million, $22.2 million and $26.9 million, respectively. Inventory of $2.3 million at March 31, 2015, is higher than the balance at June 30 of $1.3 million. That increase is a direct reflection of growth in the business as well as preparing for the upcoming flu shot season. In April 2015, we extended and expanded our credit facility into a new $9 million credit facility, which provides up to $4 million for working capital purposes and $5 million for potential acquisitions. With that, I'll turn the call back over to David.

[David Tusa:]

Thanks, Diana. Just a couple of statements before we turn it over to the q-and-a. We remain committed to and are very excited about growing the company significantly over the long term through organic growth in our key markets, new product and service offerings, to all those potential acquisitions. Before we get into the q-and-a, let me say I expect you are going to have questions about the government business. So with that in mind, I can tell you that we're very encouraged by the prospects - the long-term prospects of government business. Particularly related to our new, unused medication management solution. We believe we're well positioned to capitalize on the interest shown by government agencies in our new solutions and that quickly, they have been adopted. So with that said and as I trust you can respect, we're not in a position to provide much more detail beyond that in what we've disclosed in the prepared remarks. And while the potential magnitude of the opportunity is not lost on us, we would prefer to abstain from speculating about government business and government opportunity. So with that, operator, let's open it up for questions.

[Operator:]

[Operator Instructions]. Our first question is from Brian Butler with Stifel. Please proceed with your question.

[BrianButler:]

I'll only ask one government question and it won't be on an outlook basis. On the government revenues that you saw and the orders that you saw in the third quarter here, would you classify those as an inventory kind of build? Or is that just kind of the normal flow-through in that they were using these?

[DavidTusa:]

You know, look, it's a new solution. What we're excited about is our TakeAway envelopes and our MedSafe are new in the sense that finally, for the first time in this country, they are able to address controlled substances. So we launched new solutions subsequent to the October 2014 change in the DEA rules. We quickly received all the approvals we need, put it on the federal supply schedule and we're starting to see the orders. We're very encouraged and the government is seeing the value in what we're doing. You know, just like any other of our customers, we talk with them on a regular basis and we're encouraged. So we'll say let us get a little bit more time behind us and see how much more business that may be out there that we can talk more about it. And then I think we'll be able to give you a better idea.

[BrianButler:]

Okay. But just a mechanics basis then. You're paid for these when you send them out to the customer, not when they are sent back. Is that correct?

[DavidTusa:]

That's exactly right. The envelopes are paid for. And the same thing with the MedSafe. But they are using both them right now.

[BrianButler:]

Okay. And then just a point of clarification on the pharmaceutical, when you talked about that $4 million in annual revenues by 2017. Was that - that's incremental, right? Right now, you're running at a pace that's probably a little bit above $4 million. So that $4 million would be incremental to where you are right now? Is that correct?

[DavidTusa:]

Right. Yes, because when the programs are initially rolled out, they're smaller. So you've got the growth in the recent ones. But more importantly, we've got the three new ones that are rolling out. They are rolling out over a period of time. We're excited about - Brandon, you may want to touch on those. Those are new drugs, new indications and we think they have the opportunity to be quite large.

[BrandonBeaver:]

Brian, we've got a couple of programs rolling out. One here within the next quarter or two, you'll see, I think our pharmaceutical market. We continue to drive awareness amongst the manufacturers out there. So while we have some depth and breadth within a couple of manufacturers, we're starting to see other manufacturers gauge interest in this program. And so that's building our pipeline. As we all know, pharma is a very long pipeline. We're looking at drugs right now with some of these guys that are into 2018 and 2019 - literally. So as we start to bring on manufacturers, we think that over the next 18 months or so, we've got a couple of them already locked in with us.

[BrianButler:]

Right. I just wanted to make sure - when you look at your run rate today plus those - that kind of outlook that you gave, you're talking to kind of a business that's in the $7 million to $8 million for that segment, barring any, I guess, large attrition?

[DavidTusa:]

That's right.

[BrianButler:]

Okay. And then on the retail side, is that going to play out or is expected to play out kind of like 2014, where you had the down third quarter and then it came back very strong in the fourth quarter? Or is there something else timing-wise that's happening in that segment?

[DavidTusa:]

No, that's what we expect to - we'll start to see that pickup in the June quarter. And that's when I mentioned earlier that the June quarter is expected to be strong. We'll have the beginning of the flu. We'll have some pharma manufacturer business. And I think we'll see growth in some of the other sectors as well. So I think the June quarter is shaping up to be strong.

[BrianButler:]

Okay. And then just one last one, on the third party kind of incinerator business, I think you have it as environmental. Could you just give a little color on what expectations are and how that business has shaped up? At one point, I think it was expected to be a little bit of larger contributor and it seems to have slowed down.

[DavidTusa:]

That's right. That's third-party incineration services and they're really more on a project-by-project basis. It's not like a recurring revenue business. It's projects where a company or government agency or someone may need some incineration. They are very hard to predict and they're lumpy. They happen when they happen. And we had a couple of good ones in some quarters. It's been dry lately, but we're chasing a few. So hopefully, we have the opportunity to increase that sector going forward.

[Operator:]

Our next question is from Kevin Steinke with Barrington Research. Please proceed with your question.

[KevinSteinke:]

I just wanted to ask about the government - but not, again, about future prospects. Just in terms of sequencing here. So did the two government agency orders that you get, did they come after your solutions were placed on the federal GSA schedule or before?

[DavidTusa:]

The envelopes were placed on - they were purchased after we put them on the federal supply schedule. Now the MedSafe was before. And they are in response to the need that has been out there, Brian, for years in how do you deal with these unused medication? How do you deal with these controlled substances?

[KevinSteinke:]

Right, okay, yes. So it's the federal GSA is - could be a facilitator in the future again without--

[DavidTusa:]

It is, and the DAPA as well. The DAPA is the Department of Defense. I'll put it this way, of the MedSafes that we've sent out or that are pending, we probably have about half of them or more that have been ordered by major government agencies.

[KevinSteinke:]

And you know, you mentioned the early adoption by government of both TakeAway and MedSafe. Do you think that's something you can use when you are marketing to other markets in terms of the government adoption? Is that something you would look to use as kind of a driver of sales in other markets?

[BrandonBeaver:]

Absolutely, we plan to utilize some of the government's success and continued purchases of that with more of the private sector - looking at long-term care, looking at our retail pharmacies, hospice and law enforcement, things like that. That is absolutely something we plan to use as kind of a stepping stone.

[KevinSteinke:]

And just could you expand a little bit more on your optimism regarding unused medication management solution sales in the upcoming quarter and going forward?

[DavidTusa:]

There is significant interest on the government side. We know that. The sales of MedSafe on the private sector side have been really more in the smaller chain so far, but we think we have opportunities to expand that as well. I think on the private sector side that they've spent a little bit more time studying the solution, looking how it fits into their operations, reading the rules. And we were just really pleased at how the government just really took it and ran with it much quicker. So we can sit here and speculate - which we're not - or we can show you in the quarterly financials the progress that we're making. And that's what we plan to do.

[KevinSteinke:]

And would you care to offer any comment on the new credit facility you have in place?

[DavidTusa:]

Sure. I mean, we're planners, right?

[DianaDiaz:]

Right.

[DavidTusa:]

Diana worked on that, started working on that back, I don't know, six months, seven months, eight months ago. And we're planners. We're looking at acquisitions. We've talked about that before. And so we make sure that we have that in place. So as we grow the company and opportunities are out there that we think make a lot of sense and we have plenty of financial firepower to get the deals done.

[Operator:]

Our next question is from Ryan Daniels with William Blair. Please proceed with your question.

[NickHiller:]

This is Nick Hiller in for Ryan Daniels. Thanks for taking my question. I just had a quick one on home health. It's been down for four quarters now on a year-over-year basis and trailing 12-month, it is down 8%. Could you help me understand what's driving that? I guess I understand how the timing by distributors could be explained in a sequential step-down. But having a little bit of trouble with that on a year-over-year decline.

[DianaDiaz:]

It is extremely difficult to manage customer relationships and satisfaction through a distributor. But based on the fragmented nature of this market, the home healthcare market, the distributor network is often the only way that we can reach these customers. We're seeing strong sales in the month of April of 2015, but it's really hard to predict whether those ordering patterns will continue at that level for the rest of the quarter. We're trying to just manage as best we can and try to get growth where we can.

[BrandonBeaver:]

Nick, I'll also add a point onto that. Over the past 10 years, we've worked really hard to diversify our revenue base. If you were to go back a number of years, home health was a significant portion of our revenue. And I think we've done a great job of diversifying into other markets. Now it's really - home healthcare is no longer over half of our business. Year-to-date basis, healthcare makes up roughly 23% of our billings. So while it's certainly not where it's at where we want it to be. I think we've done a great job in being able to diversify into other markets.

[Operator:]

[Operator Instructions]. Our next question is from Shawn Boyd with Next Mark Capital. Please proceed with your question.

[ShawnBoyd:]

A couple things, on the sales force, you indicated that we ended the quarter around 21 reps all in. Should we expect you to end the year there as well? And then can you give us just a kind of preliminary view? Would you expect to build it again by another 5 or 6 reps in FY 2016?

[BrandonBeaver:]

Yes, definitely, you see the movement of our sales team, whether it be inside, field, support. It continues to drive north. I would anticipate the rest of this fiscal year it to be close to that. We may add a couple of bodies here or there. But I would absolutely look at 2016 as seeing some growth. You go back even to the end of March 2014 - we're at 14 [indiscernible]. So you can see the significant growth and you can see the build that we're putting into our SG&A and our bodies and our sales force. So it certainly is an absolute strategy of ours to continue to grow. Methodically - we're not going to add bodies just to add bodies. We're definitely going to do it where we feel it has its - the strongest ROI.

[ShawnBoyd:]

And on the order question, there has been a lot of talk here on the call about both retail and a little bit on the home healthcare side and sort of timing of orders. And that you expect a strong June quarter. So I guess the way to kind of come at that, a broader perspective, is has your internal outlook for the fiscal year changed? Or do you expect this June quarter strength to make up for the weakness in the March quarter?

[DavidTusa:]

I'll tell you this. From a opportunity perspective, - and it's no guarantee, but I think that the June quarter could look close to what the December quarter looked like. What was that - like $8.7 million?

[DianaDiaz:]

Right.

[DavidTusa:]

About $8.7 million, so I think we have the opportunity to - and that was a record quarter, I guess, in the December quarter. So I think the June quarter has the potential, has the opportunity to be that strong as well.

[ShawnBoyd:]

Now on - well, government. You've kind of muzzled us right from the get-go and the other guys have already taken a shot. So I'm going to leave it at that. The only question on that would be you're going to have - at the next call, you'll have 2 to 2.5 quarters under your belt with the new solution selling into that market. Would you be able to give us kind of a sort of a full-year picture into FY 2016, say on the next earnings call, as to how that is shaping up with these two different agencies?

[DavidTusa:]

Yes, I think so. I think by the time of the June quarter or the fiscal year-end call, we should have much more visibility and be able to tell you much more about it. That gives us another three or four - we did that in August, right? So that's June.

[DianaDiaz:]

Right.

[DavidTusa:]

That should be plenty of time to be able to give you a much better perspective on the opportunity going forward.

[ShawnBoyd:]

Okay. And last question for me, in terms of the margins, it looks like - we certainly had a tough quarter here with timing of orders, etc. And so from an incremental margin standpoint on the gross margin and then also when I look at kind of incremental SG&A, it was a bit low relative to targets. Is anything going on that we should move away from that kind of 50% incremental gross margin target and the 10% incremental SG&A?

[DavidTusa:]

No. I think that those numbers, they'll still work. It's 50% gross margin on the incremental purchases. And we've always said on the SG&A, we said 5% to 10%. I think it's come in about 6% this year. So it's probably a little closer to the 5% and then probably the 10% on the SG&A.

[Operator:]

Our next question is from George Walsh with Gilford Securities. Please proceed with your question.

[GeorgeWalsh:]

David, in the press release, you do mention in the outlook for fiscal year 2016 the potential contributions from acquisitions. Is there any general statements you can make relative to that in terms of--?

[DavidTusa:]

Sure. We can; we've talked about it. We're looking to grow the company potentially through acquisitions in addition to the organic growth in the new products and services. And we're looking and we've looked at many. Many companies that have value-added products and services that we could sell into our existing and prospective customer base. And we have the luxury of being methodical. We're not going to just go out there and just buy a company to buy a company to say that we bought a company. We want to make sure that it's well run, solid management, very value-added product and service. We want low to no integration risk. And we've looked at them and I will tell you, we're starting to get closer. And we would be hopeful, maybe by the end of the calendar year, that we would have closed one or two. But we're not going to just go do it to do it. And we're going to make sure - you know, the last thing we want to do is disrupt our core business and everything we've built by going out and doing something that doesn't make sense.

[GeorgeWalsh:]

Okay. And just strategically, I was just wondering with the - if you did more than one, would they be in the same area or would it be two different areas that you'd be enhancing the business?

[DavidTusa:]

I think it would be in the same area, but we'll see. We're looking and we're traveling all over the country and visiting with a lot of folks. But we hope to have some more information again between now and hopefully the end of the calendar year. But we're excited about what we've seen. And we have found some things that we think would be a really good fit into the company's strategic plans.

[Operator:]

There are no further questions. At this time, I'd like to turn the call back over to management for closing remarks.

[David Tusa:]

Thank you, everyone for joining our call. We look forward to speaking with you on the next quarterly earnings call. Have a good day.

[Operator:]

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.