Sharps Compliance's CEO Discusses F3Q2014 Results - Earnings Call Transcript

| About: SHARPS COMPLIANCE (SMED)

Sharps Compliance Corp. (NASDAQ:SMED)

F3Q2014 Earnings Conference Call

April 30, 2014 11:00 AM ET

Executives

John Nesbett – Investor Relations-Institutional Marketing Services, Inc.

David P. Tusa – Chief Executive Officer & President

Diana P. Diaz –Vice President & Chief Financial Officer

Analysts

Nick M. Hiller – William Blair & Co. LLC

Brian J. Butler – Wunderlich Securities, Inc.

Joe P. Munda – Sidoti & Company, LLC

Kevin M. Steinke – Barrington Research Associates, Inc.

Craig C. Hoagland – Anderson Hoagland & Co., Inc.

George Walsh – Gilford Securities

Operator

Thanks and welcome to the Sharps Compliance Third Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

I would now like to turn the conference over to your host Mr. John Nesbett of IMS. Thank you, you may begin.

John Nesbett

Good morning and welcome to our conference call to discuss Sharps Compliance’s financial results for the third quarter of fiscal 2014. On the call today, we’ve David Tusa, Sharp’s President and Chief Executive Officer and Diana Diaz, Sharps Vice President and Chief Financial Officer. David will review the Company’s business operations and growth strategies, Diana will review the financials.

Immediately following their formal remarks we will take questions from our call participants. If you are listening via webcast, please note that you’ve the ability to submit questions through the Internet. As you’re aware we may make some forward-looking statements during the formal presentation and the question-and-answer portion of this teleconference. These statements imply the future events which are subject to risks and uncertainties as well as other factors that could actual results to differ materially from where we are today. These factors are outlined in our earnings release as well as in the documents filed by the Company in the SEC. It can be found at our Web site or at sec.gov.

So with that, let me turn the call over to David to begin the review and discussions. Go ahead, David.

David P. Tusa

Good morning, everyone. And welcome to our third quarter earnings conference call. I want to begin the call with a few highlights of the March quarter. First, although the customers billings from March were flat, we grew the business by about 30% when you exclude the retail market billings. I exclude the retail market billings from its comparison because the prior year March quarter included a day in flu shot orders that are scheduled this year for the June 2014 quarter. So, just the timing in the orders between flu shot seasons, not a reduction in the business.

Second comment, we’re scheduled to launch five more patient support programs with pharmaceutical manufacturers over the second half of calendar year 2014 and during calendar year 2015. We believe this is a direct result of our success and leadership position providing these innovative and customized programs for pharmaceutical manufacturers which are designed to improve patient experience the increased medication adherence, patient compliance while creating branding opportunities for our pharmaceutical manufacturer customers. We estimated these new programs will generate between $2 million and $3 million in incremental annual revenue once it fully rolled out to the patients.

Next, as many of you remember stating last year, we had a goal of transforming our treatment facility operation into a profit center versus a cost center. So as part of this initiative we’ll begin heavily marketing our incineration another treatment facility services over the past six months. And we’re beginning to see the impact of these efforts. And the financials were about $300,000 and relate to customer billings for the March 2014 quarter now which would generate similar and may be even greater amounts in the June 2014 quarter, any outlook for the remaining calendar year 2014 for these services looks promising.

Next, as I mentioned on our last earnings call which was in January, I’ll spoke to the fact that the June 2014 quarter shaping up to be quite strong, leads our significant orders expected in a pharmaceutical manufacturer and reach our markets. Well, we can’t make any guarantee, we can’t tell you that we believe that June 2014 quarter revenues could be could be at least $7 million.

Finally, we’ve hard core sale professional and are spending more on marketing initiatives. Which is all part of our strategy to drive revenue growth, which we believe is the best way to build long-term value for shareholders.

And with that let’s review the March quarter performance by market in a bit more detail.

Pharmaceutical manufacturer billings this quarter grew 56% to about $0.5 million or 10% consolidated revenue. Now even greater importance is the following the close of the March quarter, we received several large orders, renew inventory bills for existing customers, which we expect to contribute to the growth of the subject segment in June 2014 quarter.

Now looking past the June quarter, we expect to launch two new patient core products during the second half of calendar year 2014. And we expect to launch at least three new patients core programs for new drugs during the calendar year 2015. So we’re very focused on this market and we remain bullish on our continued success in this market.

Professional market billings grew $226,000 or 26% in the third quarter contributing about $1.1 million or about 21% of the consolidated revenues. The professional market refers primarily the customers in the general arena, veterinarians, physicians rather top care related facility. This growth has largely result of our inside and online sales channel, to show 13% increase of billings of $900,000 in the third quarter.

We are right in the middle of watching a few new and innovative marketing campaigns aimed at the professional market, which we believe have the opportunity to drive more growth in this sector.

As I mentioned earlier, we saw a decline in the retail market billings to about $700,000 as compared to the prior year of $1.7 million. Retail refers to retail pharmacies and clinics that use our systems to collect transport and process syringes used to administer flu shots, and another immunization.

The decrease for the quarter was related again to the timing of the flu shot orders for the upcoming flu shot season. And while the quarter-to-quarter comparisons can be lumpy as retail pharmacies provide more and more healthcare services to meet consumer demand this segment which we estimated have about a 75% market share remains or focused for continued growth and with that the way we view that sector is that we believe the sector has the opportunity on a fiscal year-over-year basis to grow at least 25%.

Environmental billings which are third-party billings or third-party treatment facility billings increased to $300,000 compared to $100,000 for the third quarter of the prior year, and as we focus more on marketing initiatives pushing me on the third-party services.

The Home Health Care market increased 17% to $1.8 million or 34% of consolidated revenues. Our Assisted Living billings grew 6% to about $400,000 or 8% of consolidated revenues. We believe we are well positioned to benefit from the changes the entire country is experiencing and the administration of healthcare, including a shift away from traditional healthcare settings to alternate sites, also the focus on saving money in healthcare as well as the aging U.S. population.

We believe we are uniquely positioned to service this small party generated markets, which we believe is a fastest growing market sector in the healthcare market. So as I said many times, our most significant challenge is educating the marketplace about our solutions and the opportunity to save our customers as much as 50% over the traditional route-based pickup service in a small quantity generator sector.

With that I’ll turn it over to Diana, she is going to provide a few more details on the financials, Diana?

Diana P. Diaz

Thank you, David. During the third quarter, the company recorded revenue growth of 2.6% to $5.6 million as compared to $5.4 million in the prior year period. Gross margin was 25% in the third quarter as compared to 28% in the prior year third quarter. The margin decrease is related to product mix and a few one-time charges. Selling, general and administrative expenses decreased to $2.23 million or 40% of sales in the third quarter of fiscal 2014 as compared to $2.35 million or 44% of sales in the third quarter of fiscal year 2013.

SG&A for the third quarter of last year was negatively impacted by severance costs associated with a former officer of the company. We expect the sales and marketing portion of SG&A to increase in the June 2014 quarter related to the hiring of additional sales personnel and new marketing initiatives.

The company generated an operating loss of about $935,000 in the third quarter of fiscal 2014 compared with an operating loss of $942,000 in the same prior year period. The company reported an EBITDA loss of almost $700,000 for both the third quarter of fiscal 2014 and the same period in the prior fiscal year.

The company reported a net loss of $935,000 or a loss of about $0.06 per basic and diluted share compared to a net loss of $955,000 or a loss of $0.06 per share for the prior year period. Now, I’ll talk about a few highlights from the nine-months ended March 31, 2014.

Revenue of $19.5 million in the first nine months of the current fiscal year increased 20% compared to revenue of $16.3 million in the first nine months of last year. Customer billings increased 19% to $19.2 million in the first nine months of 2014. Professional billings increased 37% to $3.9 million in the first nine months of the current year as compared to $2.8 million in the same prior year period.

Pharmaceutical Manufacturer billings increased 43% to $2.6 million in the first nine months of fiscal 2014 as compared to $1.8 million in the comparable period last year. Retail billings were relatively flat at $4.4 million as compared to $4.3 million in the first nine months of fiscal 2013, primarily due to a shift in the timing of orders related to the flu shot season.

Flu business for the nine months ended March 31, 2014 of $3.4 million was up 6% in comparison with the prior-year period at $3.2 million despite the timing of flu shot-related orders described earlier in the call. While this market is traditionally and consistent quarter-by-quarter, as demonstrated by the variability in demand during the third quarter, the expansion of healthcare services in retail pharmacies, overall, drives growth for the Company.

Fiscal 2014 year-to-date gross margin was 33% as compared to gross margin of 29% in the first nine months of last year. SG&A expense was $6.8 million in the first nine months of fiscal 2014, an increase of 5% over the prior year period as a result of increased investment in sales and marketing initiatives. Our operating loss improved to about $700,000 in the first nine months of fiscal 2014 as compared to an operating loss of $2 million in the first nine months of last year.

Our EBITDA improved significantly to $150,000 in the first nine months of 2014 as compared to EBITDA loss of $1.2 million in the first nine months of last year. Net loss in the first nine months of fiscal 2014 was $700,000 or $0.05 loss per basic and diluted share, compared with a net loss of $2 million or $0.13 per basic and diluted share in the first nine months of last year.

Our balance sheet remains solid with $14.4 million in cash, cash equivalent as of the end of the quarter and no debt. Our strong balance sheet gives us flexibility as we build a larger company.

As we previously disclosed, Sharps has an authorized stock repurchase program in place for up to $3 million extending through calendar year 2014. During the March 2014 quarter, the company did not repurchase any shares. However, over the term of two-year program the company has repurchased 161,801 shares at a cost of $681,000

And with that, I’ll turn the call back to David.

David P. Tusa

Thanks, Diana. Just a few more comments before we go to the Q&A. We talked about saving money for our customers and I had to tell you, I think we lay a business, new business and we secure existing business, so not only the cost savings, but also our excellent customer service, our reasonable contract terms and our obsession with responsiveness.

Now, more on the sales front. I’m really pleased that they were bringing in more sales people. We’ve actually increased our field sales related staff to 10. I think we’re up on six to 10 and I think we may be bringing more. I know Brandon Beaver, our Senior VP of Sales is extremely excited about this new sales team and the opportunity in front of us. It’s all about the people and remaining focused on key markets and key opportunities.

So we believe we have the right personnel in place to grow the company significantly. And lastly before the Q&A, I just want to thank our employees in advance for the efforts I know we’ll see supporting next June quarter. It’s going to be quite busy. I know they’re going to do whatever it takes to ensure all those execution and again quality customer service. So with that operator, let’s open up for questions.

Question-and-Answer Session

Operator

Thank you. At this time we’ll conduct a question-and-answer session. (Operator Instructions). Our first question comes from the line of Ryan Daniels with William Blair. Please proceed with your question.

Nick M. Hiller – William Blair & Co. LLC

Good morning. This is Nick Hiller in for Ryan Daniels. My first question on the pharmaceutical side are the three patient support programs that you expect to launch in calendar 2015 more of this first half or second half of calendar 2015 launches?

David P. Tusa

They’re really throughout the calendar year 2015. So I think you will see that come in again over the calendar year.

Nick M. Hiller – William Blair & Co. LLC

Okay, great and then just switching gears to environmental, I was just wondering how much capacity do you think you have to grow this segment at your treatment center and what type of customers are you targeting for your – with this segment?

David P. Tusa

Well, why don’t you say it this way, I think it’s a great question about the capacity. But let me just answer a little bit different which I think will help you. The way we look at is because we’ve really freed up our treatment facility because we have about half of our mailback is now going to the closure of Daniels facility which really freed up not only capacity, but freed up operation and the ability to use the treatment facility with the third-party burns. But let me just say it this way, if we burned for say 15 days to 20 days a month that would bring in about $400,000 to $500,000 a month and that’s really the way we look at and that’s kind of considering throughput issues and just trying to be conservative how much we could push through this.

So we’re excited about it and we’re marketing the heck out of it and think we have a significant opportunity there. For competitive reasons, I really don’t want to talk about that kind of target the customers that we’re targeting, we just we’d rather show you on P&L.

Nick M. Hiller – William Blair & Co. LLC

Okay, great thanks. That’s really helpful. And then my last questions were on our gross margin, I am assuming most of the decline at least sequentially is just the lower sales base and de-leveraging there and on a year-to-year basis you called out product mix. Should we assume that retail margins are higher and any detail on those one-time items you mentioned?

David P. Tusa

There was one-time operational expenses that we have incurred. Anytime you lose mailback related business and even in this market that affects the margin. I guess the best way to look at it, if you kind of look forward and we talked about 7 million potentially in revenue for the June quarter, the best way to look at that is a 7 million and because the operating leverage about a 34% to 35% gross margin.

Nick M. Hiller – William Blair & Co. LLC

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Brian Butler with Wunderlich Securities. Please proceed with your questions.

Brian J. Butler – Wunderlich Securities, Inc.

Good morning. Thanks for taking my question.

David P. Tusa

Good morning Brian.

Brian J. Butler – Wunderlich Securities, Inc.

Can we start talk just pharmaceutical, I think I might have guessed – I am so confused you have right now about three, you have three programs running right now that that had an expectation now given about $3 million in revenues, so now you’re going to have three more programs, is that the right way to think about if that’s doing $2 million to $3 million revenues?

David P. Tusa

Yes, actually right we have about 10 programs, which probably 6, 7 contribute the majority of the revenues, so here is a way to look at it Brian. If you look at the Pharmaceutical Manufacturer market billings and what were they $2.6 million for the nine months ended, we think that there will be about, let’s say, $3.8 million for the fiscal year 2014. So that’s the revenue generated on an annual basis from those existing programs, right. So what we expect is after these new programs the five new ones get up and running that it would contribute incrementally and on an annual basis an additional $2 million to $3 million.

Brian J. Butler – Wunderlich Securities, Inc.

Okay. That’s been helpful. So the new program, how long do they ramp? Does it take a year or is it 18 months? Let me think about getting to that $2 million to $3 million run rate.

David P. Tusa

This is going to be able to show the (indiscernible) or new programs and new drugs versus launching programs for existing drugs. So we think the ramp up time of action will be relatively shorter. I’m going to guess and say maybe six months.

Brian J. Butler – Wunderlich Securities, Inc.

Okay. So by the end of calendar year 2015, you should be at the full new run rate of, call it, $5 million, almost $6 million?

David P. Tusa

Let’s look at the 2015 or watch later in 2015. So maybe it’s pre-conservative mid-2016, calendar 2016 to be up at that rate, just trying to allow for any extended or delay in ramp up.

Brian J. Butler – Wunderlich Securities, Inc.

Okay. And of the current program you have right now, is any of that $3.8 million revenue expected to go away over that same period?

David P. Tusa

No, no. What we’re seeing with these programs is we’re actually seeing it growing. We’ve got a couple of and particular where we’re doing a good job and working with the customer and they are doing a great job with working with the patients. So we’re hopeful and guarantee that we’re hopeful, but there could be some growth opportunities at $3.8 million.

Brian J. Butler – Wunderlich Securities, Inc.

Great. And then is there any incremental capital required for the new programs?

David P. Tusa

That’s a beautiful point about this business. We got the infrastructure in place to facilitate all of those programs and our maintenance CapEx stays that less than $1 million a year.

Brian J. Butler – Wunderlich Securities, Inc.

Okay. That’s good. And now let’s talk about our retail. That split that was last year like $1.7 million in third quarter and $700,000 in the fourth quarter. So that basically gets reversed in this fiscal 2014 right? That’s the way we think about it or is it…?

David P. Tusa

Right. That’s the right way to think about it. Again, the way to look at it is look from the fiscal year. Again, we always try to look at these things, because of the lumpiness, but looking at fiscal year 2014 versus 2013 basis and look for about roughly about a 25% increase in that market.

Brian J. Butler – Wunderlich Securities, Inc.

Okay. And so then that will factor into what kind of the fourth quarter will look like?

David P. Tusa

Right.

Brian J. Butler – Wunderlich Securities, Inc.

Okay. I think on the retail one. And then on the – I think to the environmental one, the environmental. When you think about – I heard that right. That was about $1.5 million a quarter is the potential for that piece that versus right here. It’s about $0.5 million a month.

David P. Tusa

We said if it’s running 15 days to 20 days a month, it is 400,000 to 500,000 a month and that is assuming that we’re continuing to pay the facility with materials for its generation. So really that we kind of look at from a capacity standpoint assuming that we have again the business to support that.

Brian J. Butler – Wunderlich Securities, Inc.

Right. So that’s kind of the top, the match level you’d expect to get out of this under the current structure?

David P. Tusa

Right.

Brian J. Butler – Wunderlich Securities, Inc.

All right. You have the ability to expand that if there is demand, the expand and so they can – more in 15 to 20 days?

David P. Tusa

Sure, we can run it more than 15 to 20 days I just try to be conservative and allowing for a couple of days of downtime for potential maintenances, but, yes we do have the opportunity to run it, run more than 15 to 20 days a month.

Brian J. Butler – Wunderlich Securities, Inc.

Okay, and get to that max capacity is there any capital required for that extension wise.

David P. Tusa

No, no there really isn’t any capital required and actually the best way to most efficiently run a treatment facility is keep it running, and to shut it down. So we’re hopeful that we potentially can really not have much, more an incremental repair cost because the best way to run it, so just keep it running.

Brian J. Butler – Wunderlich Securities, Inc.

Okay, and then a couple more here. On the revenue growth when you think about $7 million in the fourth fiscal quarter, that’s up kind of about 33%. How did the operating cost track on that I mean, if you had 50% flow back roughly, operating cost would be up 15%, year-over-year going into the fourth quarter. Is that the right way to think about it or is the mix, going make that potentially better or worse?

David P. Tusa

Let me – I’ll help you. If you think about our business when you look at the cost of good sold, think about $1 million a quarter for the fixed component, operations with treatment facility. And then think about the product of the cost, the variable cost associated with the product, think about that in 50% to 52% of revenue. So that’s the model and that’s why, I’ve already said that – these way in addition to using that way another way the model is take roughly 50% of that revenue, incremental revenue and that’s incremental gross profit.

So you’re not going to see, you won’t really I don’t think any significant increase because again, we have the infrastructure in place to facilitate this growth.

Brian J. Butler – Wunderlich Securities, Inc.

Great, we should good margin expansion on…

David P. Tusa

Sure, sure, when you modify that you’ll see the operating leverage.

Brian J. Butler – Wunderlich Securities, Inc.

And you talked about SG&A cost going up, provide any visibility on kind of the magnitude of that, and is this change where your revenue breakeven, - I mean the four year revenue breakeven was somewhere around $26 million, $27 million. Is that now moved up?

David P. Tusa

I think it has a bit but let’s just look at this way, we have about $2.2 million in SG&A in this quarter, about a $100,000 of that Ryan, was related to our legal fees associated with the CDC claim. So we’re going to replace that in the June quarter, we’ll replace that $100,000 we said on the legal fees, we’re going to replace that with additional sales and marketing and we may spend a bit more.

So, again I think you started the base of $2.2 million in SG&A and I think to escalate that going forward, I’ve always said, increase of 5% to 10% with a focus primarily on additional sales and marketing.

Brian J. Butler – Wunderlich Securities, Inc.

Okay, just one last one. On the Home Healthcare, you’ve had a – now two quarters we had really strong year-over-year growth. Has something changed here that’s giving you better organic growth that can be sustained, trying to going out farther or this really longer-term looking still kind of that mid-to-high, single-digit growth rates?

David P. Tusa

I think, I’ve already said, Home Healthcare is an area that’s just, that’s just exploding that as an industry is growing significantly. And I think Brandon and his crew are doing a really good job of working with key distributors in the home healthcare arena to push our solutions.

So I think it’s just a focus on that, but at the end of the day, I have always said, it’s growing at least 10% maybe we have the opportunity to grow it more than just 10%, was it for the nine months it was 14%, it was 14%. So we would be pleased with somewhere on an ongoing basis of 15% increase spend on the home healthcare market.

Brian J. Butler – Wunderlich Securities, Inc.

All right great. Thank you very much.

David P. Tusa

All right, thanks for the question.

Operator

Thank you. Our next question comes from the line of Joe Munda with Sidoti & Company. Please proceed with your question.

Joe P. Munda – Sidoti & Company, LLC

Good morning, Dave and Diana. Can you hear me, okay?

David P. Tusa

Yes, we can. Good morning Joe.

Diana P. Diaz

Yes.

Joe P. Munda – Sidoti & Company, LLC

Thanks for taking the questions. David, I would like to touch on the plant, I know a lot of people talked about the equalization rate, but I want to talk a little bit about what expectations are for incremental margins for that business and I mean with 40% – do you see assumption there?

David P. Tusa

I think it’s up to probably above 50% on the incremental – on the incremental margin for the – those third party services just reasonable.

Joe P. Munda – Sidoti & Company, LLC

And I know you have talked about the – the possible level of utilization 15 to 20 days a month. I am just wondering, what’s the nature of that business, is it – is there any recurring component or is it more of an equally shell type of a situation?

David P. Tusa

It’s both. It’s both. We do get some recurring revenue but it’s also back filled with lumpy order type project work. So again let me tell you, our marketing crew has done a great job of going out there and marketing those services and our folks at the treatment facilities have done a great job at here making it happen and by the way we’ve been really pleased with and the customers have been as well with the treatment services provided. So yes, again I am optimistic and I think that growth in that market is promising.

Joe P. Munda – Sidoti & Company, LLC

Okay, also you spoke about – I am jumping around here, you spoke a little bit about the additional reps you had in the quarter, you said it went from 10 – from 6 to 10. Was that 6 reps in this quarter and then you’re going to 10 in the June quarter, how should we do?

David P. Tusa

If we mention that at December 31...

Diana P. Diaz

That’s right.

David P. Tusa

And that’s a net number we also replaced cylinder ones that we had and I am really excited because the – the folks we’re bringing in have significant experience in medical ways. It’s such a niche market and to find really solid sales people that can walk in and potentially make a difference when they – whey they start is exciting, so Brandon did a great job of going out and he spend a lot of time interviewing a lot people and we’re pleased with the people that we have and we may add another one or two.

Joe P. Munda – Sidoti & Company, LLC

Okay. And – staying on that subject I mean you have just spoke about SG&A up 5% to 10%, is that sequentially do you take that 2.2 million number this quarter and are we looking at a 5% to 10% increase next quarter about year-over-year?

David P. Tusa

That’s year-over-year.

Joe P. Munda – Sidoti & Company, LLC

Okay. And then I mean a lot of my questions like I said were answered, my main question here is hitting the $14.4 million on the balance sheet, no debt, any ideas on what you will need the cash for.

David P. Tusa

We do have sales modules and what she is said that cash flow. We are just not ready to talk about it, but where we do, we’re actively looking at particular opportunities to grow the business and to put some other cash to use in investing in the business.

Joe P. Munda – Sidoti & Company, LLC

I mean would that involve the M&A or would it be development of your own proprietary business.

David P. Tusa

It could be both.

Joe P. Munda – Sidoti & Company, LLC

Okay. I think that’s it for me. Thank you

David P. Tusa

Thanks.

Operator

Thank you. Our next question comes from the line of Kevin Steinke with Barrington Research. Please proceed with your question.

Kevin M. Steinke – Barrington Research Associates, Inc.

Good morning, Dave, Diana.

Diana P. Diaz

Good morning.

David P. Tusa

Good morning. How are you?

Kevin M. Steinke – Barrington Research Associates, Inc.

Good, how are you?

David P. Tusa

We’re good.

Kevin M. Steinke – Barrington Research Associates, Inc.

Could you just give us an update on the Daniels Alliance and what you’re seeing in the pipeline there?

David P. Tusa

Sure, we have went into with the Daniels Alliance and really it’s helped us to market the company as a full service provider of medical waste services. The deals that we work on, Kevin are the larger deals and those are ones with a little bit longer sales cycle. So let’s say it’s 200, 300, 400 location facility it could be as many in any other markets. So we actively are going after the markets and we’re actively working to bring into subcontracting of those the route-based pickup services for the portion of the business that really should be large for mailback. So it’s quite active with those opportunities but again those are larger deals for the sale cycle is a bit longer.

Kevin M. Steinke – Barrington Research Associates, Inc.

Okay, is the expanded field sales force that you brought in, are they going to be really going after those Daniels opportunities or what’s going to be keeping them busy?

David P. Tusa

Well, they’re going to be after a lot of things, but the folks that we brought in have a lot of experience on the medical waste size to large quantity, medium quantity and small quantity. So I think that they’ve got a nice – they ahead of evolving in the sense so they understand all sides of the business. So with that I think that we’ll see more and more opportunities or we can combine the mailback with that pickup service to provide a full service to the customer.

Kevin M. Steinke – Barrington Research Associates, Inc.

Okay, and on the five new patients support programs, $2 million to $3 million in aggregate but are there any significant differences in the sizes of the programs in the pay in terms of the ones launching in 2014 versus 2015?

David P. Tusa

There are all different and some of them larger and some of them smaller. It’s really difficult with the ones that we’re going to first launching to try quantify. I know you want to – what’s going to hit the quarter but let’s just say that the ones for 2014 we think probably represented to the average type or size of the opportunity of the product.

Kevin M. Steinke – Barrington Research Associates, Inc.

Okay, okay and you added people into the field sales team, but you also talked about launching some new inside sales campaigns and I don’t know if you want to get into more color on that and if you are also adding inside sales people.

David P. Tusa

We’re adding inside sales folks. At this time, I really don’t want to talk about what we’re doing with the campaign, obviously they are new and they are innovative. We are excited and we think that the focus is on educating those 800,000 prospects out there of the alternatives to that broad-based pick up and of the convenience and the ease of transition of mailback services.

Kevin M. Steinke – Barrington Research Associates, Inc.

Okay. Well, thanks for taking my questions.

David P. Tusa

Thanks, Kevin.

Operator

Thank you. Our next question comes from the line of Craig Hoagland with Anderson Hoagland & Company. Please proceed with your question.

Craig C. Hoagland – Anderson Hoagland & Co., Inc.

Hi, I was hoping if you could just go through maybe the high level of the economics of – when you direct the mailback volume to Daniels Facility product to your own facility. How that kind of flows through the financials in terms of the impact on gross margin, operating margin and then eventually return on capital?

David P. Tusa

Well. Let me just first talk about some really painting a bigger picture perspective. It’s significantly lowers the return of transportation costs of our mailback to our facilities for treatment. So some of that is offset before we pay obviously Daniels to process the mailback, but it does reduce our costs one of most significant cost on cost development and cost of sales related to our mailback. I’d really like to stay away from getting very granular with that for competitor reasons.

Craig C. Hoagland – Anderson Hoagland & Co., Inc.

But the net of the gross margin is lower, is that what you pay Dans is higher than what you save on the transportation costs.

David P. Tusa

It’s just the opposite.

Craig C. Hoagland – Anderson Hoagland & Co., Inc.

It’s the opposite.

David P. Tusa

Right, so principally.

Craig C. Hoagland – Anderson Hoagland & Co., Inc.

And then, you free up capacity on your facility obviously to take up the volumes.

David P. Tusa

Yes. That’s just as equally or more important than the approved reduction on the cost on the return transportation, but I really guess is, it frees our facility you have to go out there and use it for third-party activity which can be a nice margin business and that's why you saw the $300,000 in environmental services revenue this quarter.

Craig C. Hoagland – Anderson Hoagland & Co., Inc.

Okay. Then I guess, I need to back to the comment that mix was a negative effect on gross margin year-over-year. What was the higher element of mix that diluted margins?

David P. Tusa

Well. Again first of all, they were some one-time costs that were included in the cost of sales. But anytime you have a reduction in revenue directly attributable to the mailback business, which is our highest margin business.

Then the effective is lower, what we do see overall margins and then the example, home healthcare market which was higher, there was more to just mailback, there are few other products that we sell that to our home healthcare market that are lower margins. So you have higher revenue from the lower margin business and lower from a higher margin business.

Craig C. Hoagland – Anderson Hoagland & Co., Inc.

Okay, thank you very much.

Operator

Thank you. Our next question comes from the line of George Walsh with Gilford Securities. Please proceed with your question.

George Walsh – Gilford Securities

Good morning. Just wanted David, what speed environment like is there any pricing push back you are getting as you bid on let’s use some of the bigger deals that’s the example relevant to Daniels. Do they get competitive whereas your pricing advantage still how is that growing with your perspective customers.

David P. Tusa

It’s on the larger deals, but what we’re typically seeing is that we could pretty easily say the customer is 30% to 40% and that's a combination above the mailback in the pickup.

George Walsh – Gilford Securities

Okay, but I’m just saying the competitively our guidance trying to match that some of the bigger suppliers are we are not seeing relative to that?

David P. Tusa

Absolutely if it is a national dealer it’s very competitive and even with those savings sometimes which you’ll see is potentially you’ll see from a competitor our reduction potentially to meet that. So we’ve got to tell on much more of the price, looking forward but as mentioned – I got to tell you that there is a significant element, it’s related to customer service. The contract terms are very, very important as well. We are very reasonable with respect to contract terms and then we are – the customer service I think, we do a phenomenal job so it’s not always price.

George Walsh – Gilford Securities

Yes, the customer is not like being locked in or some of the other just whatever other some of the terms maybe that they are working under?

David P. Tusa

Sure, what they do is, they like to make sure that there are price increases and our price increases are very, very reasonable, and then they don’t want to be locked in. I mean we’ve closed the deal where – we were at the table let’s say, you know what just give us a shot and let’s try this for a year and that we are confident that we are going to perform. And that this should renew the business, I think exactly what happened.

George Walsh – Gilford Securities

Okay good. You mentioned with CDC, any update on the progress there, there is some moving cost but, how that’s going?

David P. Tusa

We are making progress it’s probably not appropriate to comment on pending litigation. We are making, and I’ll just say, that this is going to be a resolution at favorable resolution. And I think, we could potentially see something in the June quarter.

George Walsh – Gilford Securities

Okay great, thanks David.

David P. Tusa

Thanks George, you bet.

Operator

Thank you. Our next question is a follow-up from Brian Butler with Wunderlich Securities. Please proceed with your question.

Brian J. Butler – Wunderlich Securities, Inc.

Hi, thanks for taking my follow-up. Just to clarify, on the Pharmaceutical so the new programs that means you won some of those bids that were outstanding. Can you give any update on what if you still have remaining out there? Or what that pipeline kind of looks further out?

David P. Tusa

Well, that’s good question for competitive reasons, I really don’t want to talk more than just (indiscernible) just for competitive reasons. We just kind of leave it at, we landed five deals and we think that is continued to be a significant market for us and we think, we can generate continued and significant growth and we continue to be successful in that market.

Brian J. Butler – Wunderlich Securities, Inc.

May be other than very generally than, are there it’s still out there?

David P. Tusa

Yes.

Brian J. Butler – Wunderlich Securities, Inc.

Okay, and then one last one on the use of cash that you have talked about. Is that somewhat a little bit change I guess the strategy in the sense that for a while you’d want to keep a significant amount of cash on the balance sheet because that allowed you to go to a larger customers and give you the ability (indiscernible) able to perform, with the alliance now in place, does that allow you now to have a lower cash balance on the balance sheet, what is that right number to have there now?

David P. Tusa

The way I look at it Brian is, we’ve got to have at least, I’m going to say at least $5 million maybe $8 million of cash on the balance sheet to show the perspective customers that we are very, very well capitalized. I think we have the opportunity, we have recognized some – we’ve identified some potential growth opportunities where we could invest that cash in either new products or potentially in acquisitions of larger products.

Brian J. Butler – Wunderlich Securities, Inc.

Okay, is it the right way to think of it, that gives you $4 million to $6 million that you could be spending on growth organically or I guess acquisition as well that’s the right way to think about it though?

David P. Tusa

Yes, that’s correct.

Brian J. Butler – Wunderlich Securities, Inc.

All right, great thank you very again.

David P. Tusa

All right, thank you.

Operator

Thank you, ladies and gentlemen at this time I’d like to turn the call back over to management for closing comments.

David P. Tusa

Thank you, everyone for joining the call. We look forward to speaking with you next quarter. Thanks again.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. We thank you for your participation. And have a wonderful day.

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