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Edited Transcript of SMED earnings conference call or presentation 28-Jan-20 4:00pm GMT

Q2 2020 Sharps Compliance Corp Earnings Call

HOUSTON Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Sharps Compliance Corp earnings conference call or presentation Tuesday, January 28, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David P. Tusa

Sharps Compliance Corp. - President, CEO & Director

* Diana Precht Diaz

Sharps Compliance Corp. - VP, CFO & Corporate Secretary

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Conference Call Participants

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* Brian Joseph Butler

Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Joseph P. Munda

First Analysis Corporation - VP

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

* Jennifer Belodeau;Institutional Marketing Services;Vice President

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Presentation

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Operator [1]

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Greetings and welcome to the Sharps Compliance Second Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Jen Belodeau, Investor Relations for Sharps Compliance. Thank you. You may begin.

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Jennifer Belodeau;Institutional Marketing Services;Vice President, [2]

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Thank you. Good morning, and welcome to the Sharps Compliance Second Quarter Fiscal 2020 Earnings Call. On the call today, we have David P. Tusa, the company's President and Chief Executive Officer; and 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. Go ahead, David.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [3]

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Thank you, Jen. Good morning, and welcome everyone to our second quarter fiscal year 2020 earnings conference call. Our second quarter results continued the momentum of our strong start to the fiscal year 2020 with revenue growth of 18% to a record of $14.6 million in revenue. Also, record customer billings of $14.9 million, enhanced gross margins and increased profitability.

The company generated EPS of $0.06 and $0.10 per share for the second quarter and fiscal year-to-date, respectively. This compares to $0.05 per share for the corresponding prior year periods.

We believe the strong growth and improved profitability generated in the last fiscal -- 3 fiscal quarters is a direct result of our company's successful transformation from a medical waste mailback and flu business-only company to a comprehensive solution provider to the health care-related and retail markets with multiple solution offerings.

The strong growth in the second quarter customer billings were driven by the following markets; Pharmaceutical Manufacturer, Home Health Care and Professional. We also delivered substantial growth across each of the 3 key solution offerings; unused medication management, route based and our traditional mailback offering, with the mailback growth for the quarter primarily driven by strong Pharmaceutical Manufacturer billing.

Now I believe it's very important to expand on the fact that we've diversified the business from a flu-only business. This is evidenced by the following: when you exclude flu-related billings, customer billings increased 36%, 32% and 24% for the second quarter, fiscal year-to-date and trailing 12-month periods. This is reflective of our strategy to generate strong growth in markets outside of flu with a focus on increasing more predictable and recurring revenue businesses such as MedSafe, the route based and our mailback-related Pharmaceutical Manufacturer business. Now Diana will go into a bit more detail on the growth by the individual markets later in the presentation.

So from a solutions standpoint, our route-based business grew 19% in the second quarter. We began expanding our route-based presence a few years ago as a complement to the mailback offering and because we wanted to establish more predictable and recurring consolidated revenue. Our increased route-based footprint also allows us to address larger volumes of medical waste and related facilities. It also allows us to fill the need of the marketplace for these services to the small and medium quantity generator market. We believe there is a significant opportunity for continued growth in the route-based business.

We continue to see strong demand for our unused medication solutions, which grew 72% in the quarter and 57% for the fiscal year-to-date period. Our solutions in this segment includes the MedSafe and the TakeAway Medication Recovery System Envelopes. We believe we are the leader in the patient-dispensed ultimate user unused medication management business, which represents 16% of our overall billings in the second quarter of 2020.

At December 31, 2019, we have an installed base of 4,500 MedSafe collection receptacles for unused medications in retail as well as hospital pharmacies, long-term care, drug treatment and law enforcement facilities. Our customers have returned and we have processed over 45,000 inner liners.

To put that in perspective, a year ago, we had 2,900 installed collection receptacles and returned liners of 24,500. As we move through the second half of fiscal year 2020, we anticipate continued strong growth for this solution as we help industry address and, hopefully, solve the opioid crisis through prevention and proper disposal of unused medication, including controlled substances.

Our mailback business grew 10% compared to the prior year quarter and was positively impacted by the inventory builds for Pharmaceutical Manufacturer patient support programs and increased sales of our TakeAway Recycle System. Growth for these mailback solutions was partially offset by decreases in flu-related orders compared to the prior year due to the timing of customer purchases.

We made solid progress this quarter with our TakeAway Recycle System, which is designed to facilitate recycling of single-use medical devices.

In the December 2019 quarter, as anticipated, we had a little over $500,000 in orders for the TakeAway Recycle System compared to $200,000 in the same quarter of the prior year. We continue to see strong demand for the TakeAway Recycle System and are working on a number of prospects, which we believe could positively impact the calendar year 2020.

We're very excited and energized by the recent success and the significant growth we are experiencing. And we remain intent on driving sustainable recurring revenue over the longer term as we create awareness of the company and its solution offerings. We are particularly focused on markets which we believe to be greatly underserved and where we believe there's a significant opportunity to attract customers who are looking for alternatives to their current provider.

We find that our focus on customer service, responsiveness, regulatory support as well as reasonable contract terms are very important elements in securing new business and onboarding new customers.

So with that, let's turn it over to Diana to cover the financial section in a bit more detail. And then, afterwards, I want to make a few closing comments before we open up the call for the Q&A.

Diana?

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [4]

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Thank you, David. Second quarter fiscal 2020 revenue increased 18% to $14.6 million as compared to $12.4 million in the second quarter of fiscal 2019 and increased by 7% sequentially compared to the first quarter of fiscal 2020.

Route-based pick-up billings for the second quarter of fiscal 2020 of $2.5 million are up 19% compared to $2.1 million in the prior year quarter and contributed 17% of total billings for the quarter.

Our unused medication billings of $2.3 million are up 72% compared to the prior year quarter and contributed 16% of total billings for the quarter. Our mailback billings of $8.9 million are up 10% compared to $8.1 million in the prior year quarter and contributed 60% of total billings for the quarter.

Of the $1 million increase in unused medication billings, about $650,000 of the increase was related to our MedSafe program with the remainder related to our TakeAway Medication Recovery System Envelopes.

Gross margin improved to 33.5% in the second quarter as compared to 32.2% gross margin in the second quarter of last year.

SG&A expense increased 22% to $3.6 million or 25% of revenue for the second quarter of fiscal 2020 compared to SG&A of $3 million or 24% of revenue in the same prior year quarter. The increase in SG&A compared to the prior year quarter is related to continued investments in sales and marketing and increases in professional fees.

Looking forward, we expect SG&A for the fiscal 2020 period to increase 15% to 16% over fiscal 2019. This is higher than the 5% to 7% annual SG&A increase we've experienced in the past. The reasons for this are as follows: first, we're investing more of the growth in earnings and to additional sales and marketing expense to continue the momentum of revenue growth. Second, because of the significant increase in recurring revenue and corresponding visibility, we're more confident in the forecasted earnings and the ability to see return on the increased SG&A. And finally, our pipeline of opportunities is more full than ever, and we want to accelerate closure.

The company reported operating income of $1.1 million in the second quarter of 2020 compared to operating income of just over $800,000 in the second quarter of 2019. We recorded net income of $1 million or $0.06 per basic and diluted share this quarter compared to net income of almost $800,000 or $0.05 per basic and diluted share in the second quarter of 2019.

The company recorded EBITDA of $1.5 million in the second quarter of fiscal 2020 as compared to EBITDA of $1.2 million in the same period of last year.

Now let me provide some additional details around the quarter on a market-by-market basis. I'll start with our Pharma Manufacturer segment, where we saw growth of 170% in the quarter and 95% for the fiscal year-to-date period. Currently, we have 17 programs with 10 Pharma Manufacturers. These programs are designed to help our Pharmaceutical Manufacturer customers create additional touch points with their patients and provide actionable data, which could lead to improved drug adherence.

We saw significant mailback inventory builds for several existing patient support programs during the second quarter, which contributed to the strong billings. One program, in particular, is growing significantly, adding new self-injectable drugs and patient support programs, which contributed to the strength in billings for the quarter.

And our field sales efforts are very focused on new patient support opportunities as more and more drugs introduced into the marketplace are home self-injectables.

Our Retail segment was essentially flat at $4.2 million for the quarter. As you may recall, we experienced very strong flu orders for the September 2019 quarter, which increased by $1.4 million over the prior year quarter.

For the second quarter ended December 31, 2019, flu-related billings decreased by $900,000, which were offset by an increase in unused medication billings to the Retail market. Of note, for the overall 2019 flu season, which we measure on a calendar year basis, orders were very strong as demonstrated by an increase in flu-related orders for the trailing 12 months ended December 31, 2019, of 20%.

Our Home Health Care segment achieved billings growth of 21% in the second quarter and 45% for the fiscal year-to-date period. These increases are driven primarily by our expanded relationship with a major health care distributor. We are encouraged by the growth in this market, which has traditionally experienced low to mid-single-digit growth.

Professional market billings grew 14%. Through a combination of our cost-effective and easy-to-use Sharps Recovery System and the route-based pick-up services, we've driven organic growth in this segment by addressing the small-to-medium quantity waste generator market that includes physicians, clinics, dentists, surgery centers, veterinarians and other health care providers. We believe the Professional market is probably the most underserved in the small and medium quantity generator sector in the country. We're working diligently to increase awareness of our services to prospects looking for an alternative to their current provider.

The inside and online sales channel, which places a heavy focus on the Professional market, increased billings by 17% in the second quarter of fiscal 2020 compared to the prior year.

Now looking at key comparisons for the first 6 months of fiscal 2020. Revenue increased 24% to $28.2 million and customer billings increased 28% to $29.1 million. Professional market billings increased 13% to $8.5 million. Retail billings increased 30% to $8.4 million. Pharmaceutical Manufacturer billings increased 95% to $3.2 million related to the timing of inventory builds for several customers. Home Health Care billings grew 45% to $5.9 million. Assisted Living billings were essentially unchanged at $1.3 million. And Government billings increased 10% to $1.3 million.

For the first 6 months of fiscal 2020, our mailback solutions represented 57% of customer billings and increased 21% over the prior year. For the same period, our route-based pick-up was 18% of customer billings and grew 22% over the prior year. And our unused medications was 16% of customer billings and grew 57% over the prior year.

The insight on online sales channel, which, as I mentioned before, is heavily focused on the Professional market achieved a 13% increase in billings for the first half of fiscal 2020 compared to last year.

Fiscal year 2020 year-to-date gross margin was 33.2%, an improvement over the first 6 months of fiscal 2019 of 32.4%.

SG&A expense increased 19% to $7.1 million in the first half of fiscal 2020. And as I mentioned before, we expect SG&A for the full fiscal year of 2020 to reflect an increase of 15% to 16% over the prior year as we increased spending on sales and marketing-related expenditures.

Net income in the first half of fiscal 2020 was $1.7 million or $0.10 per basic and diluted share compared to net income of right at $850,000 or $0.05 per basic and diluted share in the first 6 months of last year. Our balance sheet remains solid with $5.3 million of cash at December 31, 2019, and working capital of $10.8 million.

Now I'll turn the call back over to David.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [5]

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Thanks, Diana. I want to leave everyone with a few key points before we turn the call over to Q&A. Four years ago, we made a strategic decision to move into the route-based business via acquisition and organic expansion. Today, we have 46 trucks on the road servicing over 13,000 customers in 24 states and soon to be in 31 states, representing about 70% of the country. This line of business has grown from customer billings of $2.1 million in fiscal year 2016 to $10 million for the current trailing 12-month period. The route-based business is an excellent fit for our service offering and customer base, which, we believe, we have the opportunity to grow significantly.

In late 2014, the DEA changed its rules to allow collection receptacle inner liner system to collect, transport and destroy unused patient-dispensed medications, including controlled substances. We believe we're the first company to design and launch a DEA-compliant collection receptacle operating under the DEA rules to serve retail pharmacies, pharmacies, hospitals and long-term care facilities.

The MedSafe solution is not only a great name, but it's also becoming what we believe to be the standard in the industry as evidenced by our leadership position. When coupled with our industry-leading TakeAway Medication Recovery System Envelope and other unused medication management solutions, we've generated over $8.7 million in revenue over the trailing 12 months versus $2.7 million in fiscal year 2015 when the DEA rules changed.

We believe we are just getting started with this line of business, and we see tremendous potential to grow this business significantly, while helping to solve the opioid crisis.

About 10 years ago, we pioneered a specialty mailback solution to be an integral part of Pharmaceutical Manufacturer's patient support program. Our systems are designed to increase patient touch points, improve the experience for home self-injecting patients as well as create a branding opportunity for the manufacturer. Additionally, our programs provide valuable compliance data designed to improve drug compliance and adherence. We're the leader in this business with over the trailing 12-month period generating almost $6 million in revenue in customer billing.

The pipeline for new programs continues to build as more and more home self-injectable drugs are introduced to the marketplace. So with that, I think you'll agree that with a variety of solutions we provide, our company is not driven solely by flu-related business.

As I mentioned earlier, when you exclude the impact of flu-related business, our customer billings have increased 36%, 32% and 24% for the second quarter, fiscal year-to-date and trailing 12-month periods, respectively. This reflects our strategy to generate strong growth in markets beyond the flu business as well as growth from recurring revenue businesses such as the MedSafe, the route-based business and Pharmaceutical Manufacturer mailback.

We're focused on the long term and believe we have the opportunity to become a much larger company. We're the #2 medical waste management provider to the $1 billion small and medium quantity generator market, we also believe we're a leading provider in developing the $1 billion ultimate user unused medication management business in the country. We believe we have a runway for significant growth, and we're well positioned to take advantage of our leadership position and further penetrate these markets.

Finally, we're seeing and pursuing larger dollar opportunities with all of our solution offerings as a result of the increased awareness of our company in the country as a full service provider and as an alternative to our prospects' current provider.

Needless to say, we're very excited to see that our efforts to be innovators and problem solvers is very much paying off. But again, we believe we're just getting started.

And one last thing is to take an opportunity to thank the management team and all employees for their efforts in supporting the growth over the last few quarters. It's been very busy. And it takes a dedicated, committed and driven group of employees to deliver these results. We look forward to the challenges and opportunities ahead as we continue to build a much larger company.

And with that, operator, we can turn it over to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Gerry Sweeney with Roth Capital Markets.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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Wanted to focus on the growth SG&A and et cetera. Obviously, you guided to a higher SG&A, and you also mentioned the pipeline is full. When we're looking at this speedup in spending, where -- is this more focused on the route-based or the Pharma? Where do you expect this to sort of translate to in terms of revenue?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [3]

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We believe that it has the opportunity to affect all lines of business, whether it's unused medication via the MedSafe, whether it's a route-based or whether it's the mailback business. That's the wonderful part of having all the solution offerings. And remember, there's opportunities to cross-sell a number of the opportunities within the same customer base. So we look forward to growth -- continued growth across all lines of business.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. And then just on the comment. It sounded like the pipeline is full. I mean, is this just a function of, as you said even earlier in your prepared comments, the Sharps' name getting out there, maybe some of your potential clients -- contracts running off with another provider? Just wanted to maybe bracket that comment a little bit and just see exactly...

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [5]

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Sure. So when you -- I'll look at it from each of the businesses' standpoint, when you look at the MedSafe, it's becoming more and more popular in the country. Disposal of unused medications and the programs that we've had in place, we believe were quite successful and are leading to other opportunities. And again, we're just really beginning in this country to address the opioid crisis through prevention via the unused medication collection and disposal. So we're not really taking the business from anyone, we're just selling into a marketplace that's now allowed to collect and properly dispose of unused medications.

When you look at the route-based business, I -- what I see in the route-based business is what's driving that growth is not only our name and our continually improved awareness, it's also we're expanding the footprint. And when you grow the footprint, you can service through the route based directly a much higher percentage of the business.

So when we look at the opportunities on the route-based side, when we can capture a significant portion of those servicing directly, then it becomes a new opportunity, and we're chasing a lot of those. And we've expanded the infrastructure quite a bit. So that's what, I think, that's growing that business.

On the Pharma side, there's more and more self-injectable drugs that are being introduced in the marketplace. We've got a great program. We've got great people that support these programs. And I think there just continues to be more awareness of how the patients can be provided with a proper disposal. And at the same time, the Pharmaceutical Manufacturer can increase the awareness -- I'm sorry, can increase the experience with the patient.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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On that last one, on the patient support and Pharma Manufacturing on the mailback, can you talk a little bit maybe the progression of how this -- that business rolls through? It sounds like there's been an inventory build, which sounds like this quarter maybe a little bit larger than some other quarters. But how does it play out after that? Is there maybe the length of a contract? Is there refilling or restocking? And then, I guess, you also mentioned there's, I think, working with 10 companies or maybe 10 products. Does that also offer an opportunity to expand even further?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [7]

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Right. Right. So when you think of the Pharmaceutical Manufacturer business, I think of 2 pieces. I think, one, the inventory builds, and that's the first part. The second part is fulfillment. We charge for fulfillment and shipping and getting the solution to the patients at home.

But on the inventory build, they're really focused on the number of patients, the demand, the trends and keeping the inventory levels consistent with the demands from the patients. What we saw this past quarter is we're seeing that some of our existing customers are launching additional programs. They may have more drugs -- self-injectable drugs in their portfolio, so they're adding the patient support program, ours, to the additional patients of the additional drugs. So that increases the inventory as well because you have more patients on the program. So that's really what drives it. We're excited. We have a number of opportunities that are in the pipeline. We continue to lead this business, and we think it's going to continue to be a -- drive growth for us.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

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Okay. One last question and then I'll jump back in line. Unused meds, I think earlier you sort of projected about 1,100 MedSafes sort of entering the calendar year. It feels like you might be ahead of that pace. Is that still a good number? Or has there been a speedup in some of the deployments? And I'm talking with the pharmacy partner that you're working with. So...

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [9]

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Sure. Actually, let's talk about it, if you don't mind. Let's talk about MedSafe for all customers. If you look at it from that standpoint, which I think is a really good way to look at it. Calendar year -- we look at it from a calendar year basis because our customers typically have calendar year budgets. About 1,300 in calendar year 2018. In calendar year '19 -- about 1,600 in calendar '19. So in 2020, we think we have the opportunity in calendar year 2020 to exceed that 1,500 or 1,600 MedSafe installation number in calendar year 2020. So we have a lot of customers. We have a lot of customers including the one that you mentioned, and we really look at it from an aggregate standpoint. But we're very pleased to have the 4,500 and growing out there. 45,000 liners returned, and that's only going to increase.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

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Got it. Congrats on a great quarter.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [11]

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Thanks, Gerry.

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Operator [12]

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Our next question comes from the line of Kevin Steinke with Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [13]

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Congratulations on the nice results. So I just wanted to...

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [14]

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(inaudible)

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [15]

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Sure. Yes. I wanted to follow-up on the Pharmaceutical Manufacturer discussion. I thought it was interesting that you talked about growth within an existing program helping to drive the results in the quarter. So maybe just talk about that opportunity a little bit more in terms of the opportunity to expand with existing customers is a potential growth driver in addition to adding new programs?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [16]

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Sure. We have 17 programs with 10 manufacturers. So obviously, some of the manufacturer has multiple programs. And again, as they continue -- see continued success on the programs and what it can do for the patients, they're looking at adding other drugs. That's what happened. We could see more of that. Going forward, I think what you'll probably see more of our new programs. We're chasing a number of new programs, and we have a lot of efforts focused on those. So growth on both sides. But probably -- going forward, probably new programs more than the other.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [17]

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Okay. Great. Yes, that's helpful. And maybe talk about TakeAway Recycle. You had roughly $0.5 million of billings in the quarter and you mentioned continued strong prospects, so -- for that service. So do you feel like this offering is now at the point where it could be a real business and a real growth driver going forward? I know you wanted to give it a few quarters to see how it -- what was taking hold, but it sounds maybe like there's some momentum there that provides some optimism for the future. So just any more commentary around that would be helpful.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [18]

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Sure. Yes, I think we're close and, hopefully, soon we'll be there. We've had a tremendous amount of interest in the TakeAway Recycle. And just to make sure that everyone understands what that is, our TakeAway Recycle System is all about the recycling of single-use devices. It's not -- it's keeping the devices out of health care. So it's taking the devices out of health care, breaking it down to its individual components and putting it into a recycle stream.

And what this is, this is an alternative to what traditionally some health care facilities do with reprocessing, where they clean it and they introduce it -- or they back into health care. We keep the devices out of health care and recycle them in a sustainable manner. We have a tremendous amount of interest from a number of large companies that are looking at launching this. We're in later-stage discussion with a number of them, and I think we have an opportunity for this to become a real business. Probably, we'll know more over the next quarter or 2, but we've been very, very encouraged with the amount of interest that we've received from the industry.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [19]

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Okay. It sounds good. And on the Home Health Care front, you mentioned, again, some contribution to the growth from that expanded relationship with a large health care distributor. Is that -- do you expect that contribution to kind of level off as we go over the next couple of quarters? Or is that -- is there more opportunity for that relationship to contribute billings in the next couple of quarters here? I mean, just trying to think about how we should expect growth in Home Health Care to look going forward and maybe any other prospects for new business in that sector going forward.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [20]

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Sure. That's a great question. We've been really pleased, obviously, with the expansion of Home Health Care. That's been a single-digit growth -- probably a low single-digit growth for years and years. We're really pleased with the growth. We're working with this large health care distributor. We're working with them every day to help with the awareness of the mailback. It's primarily mailback business where we've seen the growth. And we think the opportunity to continue to show stronger growth than what we've had in the past. I think it's probably a little bit too early to be able to...

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [21]

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Right. I agree.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [22]

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To say that it's going to be the growth levels we've seen recently, but we're very, very much encouraged and think that we will see higher growth from the prior years and what -- with this new relationship.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [23]

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Okay. Great. And then lastly, in addition to the higher sales and marketing investments driving growth in SG&A, you've called out some higher professional fees in the last couple of quarters. I'm just trying to get a sense as to how meaningful those have been to SG&A in the first half of the fiscal year here. And maybe if those continue or if those kind of trail off as we move over the next couple of quarters?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [24]

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We had some professional fees. We brought in a new patent firm and we incurred -- it was in the December quarter, what, $100,000, $150,000 in professional fees to come in and to look at some of the pending patents that we have and see if there's opportunities to tweak those, improve those and try to move the process along with respect to patents. We had that. I don't think we're going to have much more of those going forward, but that did impact the December quarter.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [25]

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Okay. That's helpful. That's interesting. If I could just follow-up on that. I mean, have you had any more sense as to how that effort is going to play out? Or just still kind of in evaluation phase in terms of the patents?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [26]

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Well, the patents are related primarily to the MedSafe, and we're moving farther and farther along. It's a long process. It always takes longer. We really, at this point, can't make any conjecture over whether we'll be successful or not. But we're pushing them along. And we'd love to protect the technology that we develop as the innovator with the MedSafe. So we don't know yet, but we think it's worthy of spending some dollars on to try to see if we can get this issued, but no assurances that we will.

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Operator [27]

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Our next question comes from the line of Brian Butler with Stifel.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [28]

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Just first one, on the flu business. I mean, it looks like the season has been pretty bad. If we look at kind of the roll into your third quarter for '20, what has been kind of the order demand? I mean, typically, the third quarter is the weakest. Is that still playing out that way? Is the strength of this season adding to maybe some more upside here?

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [29]

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So yes, I would agree that the March quarter is typically the lowest in flu orders. Last year, we had just under 400,000 of flu orders in the March quarter. But on a trailing 12-month basis, which is really the flu season, the flu orders were up 20%.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [30]

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So what do -- the March quarter so far, we've had, what, a couple of hundred thousand...

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [31]

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A couple of hundred thousand, yes.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [32]

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We've had a couple of hundred thousand. We've seen -- what we typically see in the flu business, which is slowdown in the March quarter. So 400,000 in the entire quarter of last year.

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [33]

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Yes.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [34]

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And so far, 200,000 within the first month of the current March quarter.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [35]

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Okay. Great. That's helpful. On the MedSafe piece of the business, it looks like the demand for the liners has kind of kicked up. I mean, just kind of on the data that you've given on processed, it looks like in the fourth -- the second quarter of '20, you processed maybe somewhere around 7,000 liners and that seems higher than the -- you were probably averaging somewhere around 4,000 to 4,500 in 2019. Has something changed there? Are you seeing more demand for the liners now that the base has kind of hit some critical mass? Or is something else? Was there just a big restocking order somewhere in there?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [36]

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It's a beautiful part about the business. I mean, once you get more and more collection receptacles out there, the liners increase and increase exponentially. So no, you're right, but it's just normal turns that are expected with the inner liner. So beautiful part about the business is recurring revenue generated from those liners once you get the MedSafe in place.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [37]

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Okay. And then on the Professional side of the business, can you give a little color on the growth? Was that all new customer growth at 14%? Or was there some price in there? Or was it also increased demand from kind of the current customer base?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [38]

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It's primarily new customers that we're adding.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [39]

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Are you seeing any pricing pressure out there?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [40]

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Not really. We really haven't seen much in the way of changes on the pricing side.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [41]

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And when you talked about kind of expanding that footprint in the Professional segment or the route-based, I should say, is that -- how much bigger can you get with your current kind of infrastructure before you have to make a CapEx spend?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [42]

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Well, we've been and we've talked about up to 24 states, 55% of the population. We're in the latter stages of moving into the Midwest. It's going to add another 7 states. And the footprint will capture roughly 70% of the population. We're doing that organically moving into those areas.

And again, it's really important because as we go after larger and larger opportunities, the prospects want to see that we can service those directly. So we've done that so far with 3 acquisitions and everything else has been organic. And at some point in time, we like the opportunity to backfill those potentially via acquisition, whether it's acquisitions in these areas or tuck-ins. But right now, we thought it was important to have a presence in those areas, so we can serve the prospects and the customers.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [43]

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Okay. I guess that puts me into my -- another question on capital deployment. How much capital is being spent on kind of expanding that footprint when you think of that in 2020? And then also, what is kind of the pipeline of deals that are out there or that you may be looking at? Can you give some color around the acquisition market?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [44]

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First of all, there's not a lot of capital expenditures when you move into a new market. You rent a facility and you rent trucks and you hire drivers. There is some capital, but not a lot when you move into a new geographic area. We maintain a list on the acquisition side, the pipeline of acquisition candidates. We stay in contact with them and we've increased the efforts in talking to with some of these folks about -- potentially about an acquisition, but we're not going to let that slow us down and moving into these additional geographic areas.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [45]

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All right. One or 2 more here. On the Pharmaceutical, the -- you guys were probably close to -- it looks like you're about on maybe a $6 million pace depending upon how the rest of the year turns out. But I mean, this is -- seen that level maybe 2, 3 years ago. I mean, if you go back 4 years ago, you were probably close to $4.5 million, $5 million on an annualized pace. What -- is this kind of the base here? Or is it still going to be expected going forward to kind of be choppy, where after a couple of years, you have some good growth and some programs coming, some programs go? I guess, I'm just trying to understand the sustainability of the customers you have versus the growth that you're able to get.

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [46]

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So I mean, I think we see that these customers are continuing to grow their programs. They're continuing to have patients that are utilizing the services. And on a short-term basis, we expect -- our goal, anyway, is about $1 million a quarter for the Pharmaceutical Manufacturer market in terms of billings for the third and fourth quarters each.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [47]

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Okay. That's great. That's super helpful. And then last one. On SG&A, I know you talked about helping all of the businesses. But when you think about, I guess, in aggregate like that and increasing it 15% to 16%, I mean is the idea that that's supporting 15% to 16% top line growth? I mean, how are we thinking about the incremental margins? I mean, the operating leverage of the business, is that still running or potentially able to run in, call it, the 30% to 40% range?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [48]

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Well, I think that additional investment in sales and marketing is very, very, very important to keeping this momentum, driving increase in revenue. And if we don't do that, then I don't think that you'll see the kind of increases we've seen in the past. As I mentioned before, the pipeline is quite full. So we want more efforts on the sales and marketing going after these opportunities, but we're very, very focused on revenue growth -- continued strong revenue growth and again, with a significant element of it focused on recurring revenue.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [49]

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Okay. And then one last one, if I can sneak it in. Just the Home Health, that new customer relationship, is that a recurring business? So when you're kind of at a pace of, call it, the $2 million, $2.5 million of quarterly revenue, is that sustainable? Or should we think about that going away in 2021 or the back half of 2020? Or does that -- is that real durable? Is that recurring kind of business?

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [50]

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So you may recall, in the first quarter, there was a stocking order. That part will probably not recur. But the current level that we had in the December quarter is normal ongoing business, hopefully, increasing over time. But that's a level that we would expect to see going forward.

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Operator [51]

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Our next question comes from the line of Joe Munda with First Analysis.

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Joseph P. Munda, First Analysis Corporation - VP [52]

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David and Diana, can you hear me okay?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [53]

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Yes.

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [54]

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Yes.

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Joseph P. Munda, First Analysis Corporation - VP [55]

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So David, I just wanted -- a lot of the questions that I wanted to ask have already been asked and answered. But I wanted to follow-up on the reprocessing, the TakeAway med device. That's an interesting offering. So to get some clarity there, essentially, you're keeping the products out -- from getting into the hands of the reprocessors. And can you give me -- or give us some color on maybe the types of devices, for example, that you guys are collecting? And how -- I guess, walk us through how it works to make sure those devices don't end up in the hands of a reprocessor?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [56]

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That's a good question. What's happened over the last few years is there has been an effort to not reuse single-use devices. And this is part of it is, that's great. Let's not use them. But what are we going to do with them? So it's really 2 main issues: One, keep getting the single-use device from going back into health care, keeping it away from the reprocessor. And then the other one is from a sustainability standpoint. What are we doing with that from a sustainability standpoint. Make sure that it wouldn't otherwise go in potentially to the landfill. And it's been a hot issue. You can google it and see how health care facilities are looking more and more at ways of not reusing single-use devices.

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Joseph P. Munda, First Analysis Corporation - VP [57]

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Okay. But what I'm getting at is, how -- you have a box in the room that they're putting the device in. That's specific. Doesn't the reprocessor also have a box in the room? Like how do you make sure that the doc puts it in -- or the -- whoever it is, puts it in your box versus their box?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [58]

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Right. It's really up to the protocol of the health care facility, the surgery center or the...

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [59]

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The device manufacturer.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [60]

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Or the hospital or the device manufacturer. I mean, you can be talking about anything from a laryngoscope to a very complex scope that's being used in a surgery setting, but we're working with major device -- single-use device manufacturers who are trying to use this as a way to satisfy the requirements of the hospital, the needs of the hospital, at the same time, to help push their devices, obviously.

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Joseph P. Munda, First Analysis Corporation - VP [61]

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So their reps are encouraging them to put them into your boxes essentially?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [62]

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Absolutely.

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Joseph P. Munda, First Analysis Corporation - VP [63]

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Is what I -- okay.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [64]

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Right.

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Joseph P. Munda, First Analysis Corporation - VP [65]

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And then, I guess, my last question, you read in the news, the hysteria, we saw it with Ebola. Now it's coronavirus. About a few years ago, people were looking for different solution providers, whether it's masks now that are being sold out, doctor's -- are you having any conversations with any of these providers about potential orders or anything? Or is this just more hysteria, you think, but you're not going to see any potential impact as a result?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [66]

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Well, we all know that this coronavirus, it's in the early stages and currently, there's no vaccine. We're communicating with our customers should there be a surge in, say, flu shots. We've reached out to them and we've communicated and let them know that we're, obviously, ready to facilitate disposal of syringes, whether it be flu shot or any kind of other immunizations. But to date, we really have not seen significant orders that are directly related to this. But it's early, and we continue to talk to our customers about potential needs.

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Operator [67]

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(Operator Instructions) Our next question comes from the line of Michael Hoffman with Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [68]

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David, I just wanted to augment a couple of questions that Brian had started. When you think about the installed base of the MedSafe, what is your view, if I took a 5-year view of the physical installed base that you could get to, given the ongoing investment -- incremental investment in G&A?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [69]

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Well, if you look at some of the trends and look at what you have right now and some of the trends, you could -- I think you could conservatively see that we could add maybe 1,000 to 2,000 of these MedSafes a year based upon what we're currently seeing. Hopefully, there could be an uptick as there's more state programs that are launched and you have more retailers and others that jump into it.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [70]

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Okay. And then to your point, once it's installed, the liner turnover, where the more mature places they've been installed, what's the pace of turnover on liner, so we get a sense of if we're building that stairstep model of at 1,000 liners or turning over at XYZ rate and watch this sort of trend to be able to sort of map that?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [71]

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So that's a really good question. And it's true. As the MedSafe stays out longer in the facility, then the turns of the inner liners increase. And it just depends upon the type of the -- it just depends on the type of the facilities, but probably anywhere from a low 2 or 3 to maybe to as many as 5 or 6 a year.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [72]

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Okay. And then on the collection side of the business, how would you frame, within the maturity of the places you've been, your densification of your model? And where are we on that sort of opportunity to densify so that we start getting this sort of consistent operating leverage? I mean, I got the new customer growth and I understand the strategy around that and going from 24 to 30, 31 markets. But where are we in that densification in your view?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [73]

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That's a great question. There's 2 things we're doing. One, we're increasing that footprint, so we can service more customers. And we are focused as well on density in areas that we currently service. What our marketing team does, and I think they do a great job at it, they do a really good job of geo-targeting opportunities to areas where, we believe, we have the opportunity to increase the density. So we're focused on both of those. So hopefully, we'll see that majority of that growth that we're seeing on the route-based business is areas where we have the opportunity to increase the density. And you're not really adding more trucks and drivers, you're just adding more pickups to existing routes.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [74]

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Okay. And then lastly, just to close the loop on the coronavirus. So no opportunity at the moment in the sense of nobody's turning around going, "Hey, send me a whole bunch more vaccines, therefore, you get more disposal." But is there on a practical basis any other role, given the speed at which this seems to be moving? And it's -- the infection rate is happening without actually knowing that there's exposed people. Is there a role for Sharps in addressing this particular pandemic? Or is there a growing pandemic?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [75]

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Well, I think it's...

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [76]

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Just disposal?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [77]

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Sure. Well, a couple of things. One, I mean, there's not a vaccine yet. And if there is one, there will definitely be an opportunity. The other thing is the CDC continues to encourage folks to go out and get a flu shot. If you have not received a flu shot, so potentially we can get to pick up from there as well. It's just really, really early. We're in discussions with our customers, and we'll see.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [78]

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Okay. So just to be clear, it's still flu shot related. There's not some other opportunity given the speed at which this is moving at the moment. So it's -- there would be a surge in flu shots.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [79]

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Yes.

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Operator [80]

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Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Tusa for any final comments.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [81]

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Right. Thank you, operator. We appreciate everyone participating in the call, and we look forward to speaking next quarter. Thank you for your support.

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Operator [82]

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