Sharps Compliance's (SMED) CEO David Tusa on Q4 2014 Results - Earnings Call Transcript

Aug.13.14 | About: SHARPS COMPLIANCE (SMED)

Sharps Compliance Corporation (NASDAQ:SMED)

Q4 2014 Earnings Conference Call

August 13, 2014 11:00 AM ET

Executives

Jennifer Belodeau - IR, IMS Group

David Tusa - President and CEO

Brandon Beaver - SVP, Sales

Diana Diaz - VP and CFO

Analysts

Joe Munda - Sidoti & Company

Nick Hiller - William Blair

Brian Butler - Stifel

Kevin Steinke - Barrington Research

Craig Hoagland - Anderson Hoagland

George Walsh - Gilford Securities

Operator

Greetings and welcome to the Sharps Compliance Fourth Quarter Fiscal Year End 2014 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 will now turn the conference over to your host, Ms. Jennifer Belodeau of IMS. Thank you. You may begin.

Jennifer Belodeau

Good morning and welcome to our conference call to discuss Sharps Compliance's financial results for the fourth quarter of fiscal 2014. On the call today, we have David Tusa, Sharps' President and Chief Executive Officer; Diana Diaz, Sharps' Vice President and Chief Financial Officer; and Brandon Beaver, Senior Vice President of Sales. David will review the company's business operations and growth strategies and Diana will review the financials. Brandon will discuss the sales organization and related initiatives. Immediately following their formal remarks we will take questions from our call participants.

If you are listening via web cast, 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 in 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 documents filed by the company with the Securities and Exchange Commission. These can be found at our web site or at sec.gov.

So with that, let me turn the call over to David. Go ahead, David.

David Tusa

Thank you. Good morning everyone and welcome to our fourth quarter and fiscal year-end 2014 earnings conference call.

Let's go straight to the highlights; customer billings were very strong at $7.4 million for the quarter, up 46% over the prior year, which soundly exceeded our previously announced expectation of $7 million. The quarterly billings were also up 39% sequentially. The quarter included record growth in the retail segment, and very strong growth in our pharmaceutical manufacture, professional and environment markets.

Our pharmaceutical manufacturer market was solid, with an increase in quarterly billings of 91% over the prior year, more than twice the billings reflected in the sequential quarter. The increase was a result of several large orders for new inventory builds for existing customers.

Now during the second half of calendar year 2014, we will be launching two new patient support programs for new drugs, and we expect to launch four additional patient support programs for new drug therapies, approximately 12 months thereafter. We believe we are the leading provider of innovative customized Sharps programs for pharmaceutical manufacturers. Our relationships in this sector are strong, and we are pleased to see that our customers recognize the value of our services, as a provider of data supporting drug compliance and medication adherence, not simply a waste disposal solution.

The professional market billings grew 38% in the fourth quarter over the prior year, and 30% sequentially. The professional market refers to customers such as dental offices, veterinarians, physicians and other healthcare related facilities. The growth is largely a result of our inside and online sales channel efforts, which drove a 14% increase in billings to $1.1 million in the fourth quarter.

Retail market billings grew by 184% to $2 million as compared to billings of $700,000 in the fourth quarter of the prior year. This was related to their timing of large flu shot related orders for the upcoming season.

Fourth quarter retail billings were 2.7 times generated in the sequential quarter, and as many of you know, retail refers primarily to retail pharmacies, that utilize our systems to collect transport and process syringes used to administer flu and another immunizations.

Next our environmental services sector; we continue to see the positive impact of the marketing of our third party treatment services, which generated billings of over $300,000 in the fourth quarter and $755,000 for the entire fiscal year of 2014, a year-over-year increase of over 4X. We believe we could see increased growth in this sector, as we invest more in the marketing of these services and increase awareness of our services.

Finally and as previously announced on June 30 of 2014, we completed the $1.5 million or $0.10 per share settlement with U.S. government related with our claims associated with the January 2012 termination of the CDC contract. The settler represents a reimbursement of significant costs we incurred, to unwind the obligations which were necessary for us to deliver products and services required by this five year contract. We are pleased the issue was resolved in our favor, and we have cash in the bank. Now, we received the cash in July of 2014, so it's not yet reflective in the June 30, 2014 balance sheet included in the earnings release.

So all in all, a solid quarter; $7.1 million in GAAP revenue, 36% gross margins, and $0.11 in EPS, of which $0.10 is attributable to the CDC settlement.

For the full fiscal year 2014, we saw increased annual customer billings of 25%, highlighted by significant growth in our key markets, including professional retail and pharmaceutical manufacturer. We also generated a significant improvement in profitability to $0.06 per share of net income for the full fiscal year.

I want to introduce Brandon Beaver, our Senior VP of Sales, who is on the call with us today. Brandon joined the company about three years ago and quickly grasped the business while gaining the confidence of customers and prospects. Brandon landed the first national deal, whereby we customized the solution for the customer, that incorporated both mailback and the pickup service.

Since taking the reins as the leader of the sales organization back in October of 2013, he has made many changes to significantly upgrade the sales team, with much stronger and experienced personnel. Also, he is refined and focused at sales approach, while leaning on marketing for process identification and collateral support. We are already seeing the impact of the changes, and we are looking to his team to drive sales growth for fiscal year 2015.

And with that, I will turn it over to Brandon, so he could share more about the sales organization and the related initiatives.

Brandon Beaver

Thanks David. First, let me say how excited the team is about the significant sales opportunities in front of us. The pipeline of opportunities is full, and we have solutions to meet the needs of these prospects. The company has committed significant resources, both financial and personnel related to our sales initiatives, and we plan to take full advantage of this commitment, and turning it into increased sales.

As a comprehensive provider of medial and pharmaceutical and other waste management services for all markets served, we have differentiated ourselves in the marketplace by offering cost effective, customized solutions designed to address all needs of the customer. We pride ourselves on responsiveness as well as excellent customer service. We are nimble and dynamic and can turn on a dime. The strength of the sales personnel we have in place facilitates management of numerous prospects at once, with minimal supervision. This allows us to move more effectively, and chase many more deals than we have in the past.

Now David has mentioned on previous calls, we have made many changes in our sales initiatives, including adding more salespeople and refining our sales approach, specific to each market. We believe we have the team in place that can deliver the sales needed to support the planned growth of the company, between field, sales support and inside sales, the team consists of 19 personnel. Our inside sales team focuses on opportunities of say $50,000 a year and less. While the field sales team generally focuses on $100,000 plus per year opportunities.

Now of course, the sales cycle in the larger field sales opportunities is much longer, than the typical inside sales deals. We work very closely with our marketing group, to continue to refine and add to the sales pipeline, and also for collateral and sales presentation support. This approach helps us stay focused on selling and closing deals. We plan to continue to drive growth of the retail, professional, home health and pharmaceutical manufacture markets, while redoubling our efforts on the assisted living long term care markets where we have admittedly lagged. We welcome the challenge to land more and larger deals, and look forward to a strong fiscal 2015.

With that said, I will turn it back to you David.

David Tusa

Thanks for the update Brandon. Now let's turn it over to Diana, who is going to provide more details on the financials. Diana?

Diana Diaz

Thank you, David. During the fourth quarter, the company reported revenue growth of 35% to $7.1 million as compared to $5.3 million in the fourth quarter of last year. Gross margins were 36% in the fourth quarter, as compared to 30% in the prior year fourth quarter. The margin increase demonstrates our leverage on incremental sales growth.

Selling, general and administrative expense increased to $2.3 million or 33% of sales in the fourth quarter of fiscal 2014, as compared to $2.2 million or 41% of sales in the fourth quarter of fiscal 2013. SG&A for the fourth quarter of fiscal 2014 increased due to the hiring of additional sales personnel and new marketing initiatives. We believe that SG&A will increase in fiscal year 2015 by about 5% to 6%, with the increase being focused on sales and marketing initiatives.

The company generated operating income of $1.7 million in the fourth quarter of fiscal 2014, compared with an operating loss of about $700,000 in the same period last year. The company recorded EBITDA, earnings before interest, taxes and amortization of $1.9 million for the fourth quarter of fiscal 2014, compared to an EBITDA loss of $435 in the fourth quarter of last year. The company reported net income of $1.6 million or $0.11 per basic and diluted share, compared to a net loss of about $700,000 or $0.05 per share for the prior year period.

Fiscal year fourth quarter net income EBITDA and operating income include the $1.5 million or $0.10 per share legal settlement, related to the company's claim against the U.S. government that David discussed earlier.

Now looking at a few of the highlights for the year ended June 30, 2014. Revenue of $26.6 million in the fiscal year 2014 increased 23% compared to revenue of $21.5 million last year. Customer billings increased 25% to about $26.6 million in fiscal year 2014. Professional billings increased 38% to $5.3 million in 2014 as compared to $3.9 million last year.

Pharmaceutical Manufacturer billings increased 55% to $3.7 million in fiscal 2014, as compared to $2.4 million in the comparable period of last year. Retail billings increased 27% to $6.4 million as compared to $5 million in the last year. Flu business for this year of 2014 of $5.1 million was up 41% in comparison with the prior year period.

Fiscal year 2014 gross margin was 34% as compared to gross margin of 30% last year. SG&A expense was $9.1 million in the year ended June 30, 2014, an increase of 6% over the prior period, as a result of our increased investment in sales and marketing initiatives. Operating income improved to $1 million in fiscal 2014, as compared to an operating loss of $2.7 million in fiscal 2013.

EBITDA improved significantly to $2.1 million in fiscal 2014, as compared to an EBITDA loss of $1.6 million in fiscal 2013. Net income in fiscal 2014 was $1 million or $0.06 per basic and diluted share, compared to a net loss of $2.7 million or a loss of $0.18 per basic and diluted share in fiscal 2013.

Full year net income EBITDA and operating income include that $1.5 million legal settlement related to the company's claims against the government. Our balance sheet remains solid with $13.7 million in cash, cash equivalents at June 30, 2014, and no debt. Our accounts receivable at June 30 are $4.7 million, which is higher than we typically carry, but reflective of very strong sales in the month of June. Today's current cash balance is over $60 million, which reflects the collection of much of the June 2014 receivables, and the $1.5 million settlement payment from the U.S. government.

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

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

David Tusa

Thanks Diana. Just a couple of statements before we turn it over to the Q&A. We believe we have made significant progress in fiscal year 2014 ending with a strong fourth quarter. But what I have said, we are not content, while our 25% growth rate in fiscal year 2015 is good, our penetration rate of most of the key markets is still very low. So we believe we have an excellent opportunity to capture additional market share, and growing 2015 and beyond, as we educate the marketplace about our cost effective and operationally efficient systems.

Our sales team is as strong as the company has seen, and we expect solid performance from them. We believe we are well positioned to take advantage of the shift in healthcare from the traditional to the alternate side, and to continue to introduce innovative solutions in many markets, including pharmaceutical manufacturer, but we are selling data and compliance, not just disposal; and finally, we have a great group of employees. I don't believe you will find a more motivated, talented, dedicated, and yet sometimes obsessed team of people. We all work extremely well together, and everyone drops whatever they maybe doing to support a sale.

So thank you to all the employees for a successful fiscal year 2014. We look forward to an even better fiscal year 2015.

And with that operator, let's open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is coming from Joe Munda of Sidoti & Company. Please proceed with your question.

Joe Munda - Sidoti & Company

Good morning David, Diana and Brandon. Do you hear me okay?

David Tusa

Yes, we can hear you.

Joe Munda - Sidoti & Company

David, thank you for the color on the segment breakouts, very helpful. But I wanted to focus my comments on what's going on in home healthcare and assisted living? Brandon had talked about redoubling efforts there, can you give us some sense of why there is a lag that's occurring there, and is that in relation -- does that have any correlation to the distributor business that you guys are currently doing?

David Tusa

I will tell you what I am going to do Joe, I am going to take the home healthcare and I am going to let Brandon address the assisted living. On the home healthcare, a lot of that business is driven by distributors, and ordering patterns are always not perfectly matched up with the quarters. I think, the better way to look at home healthcare is look for the year. If you look for the year, we were up about 8% for the year, which is probably the highest growth rate we have had in that home healthcare in quite a while. I have always said I thought we should do a 10% to 15% increase.

So really for the year, it was close to our expectations, and maybe Brandon, why don't you address the assisted living long term care?

Brandon Beaver

Sure. So really recently, we have had a redoubling of effort on long term care. It's obviously a very fragmented industry market. We have had some decent success with some of our national accounts, and now with redoubling of efforts going back into some of those national accounts, and really getting deeper penetration within our existing national accounts, and obviously our inside sales, focusing on all of your single and two, three, four type locations, and we feel that we are tackling it from a couple of different angles now. Not just from a national perspective, but really going back after the fragmented side of the smaller locations around the country.

Joe Munda - Sidoti & Company

Brandon, how much of an opportunity is that fragmented side of the business?

Brandon Beaver

Significant. Joe, it's significant. We have done a decent job of landing some good national contracts and talking about penetration there, but a vast majority of long term care, assisted living is small fragmented sites throughout the country. And so our inside sales has made a significant effort as of late to penetrate that side of the business.

David Tusa

Joe, as you know, we have calculated -- and it's in our investment presentation. We have calculated that that market is $84 million and we are about 2% penetrated. So our solutions work extremely well in the assisted long term care market. We do have some major customers, but now its taking that low penetration rate and turning it into more sales, and as Brandon mentioned, it’s a combination of field sales and larger accounts, and I think he is very effectively using inside sales as well to go after the more fragmented piece of it.

Joe Munda - Sidoti & Company

Okay. David, how many reps did you add in the quarter, I guess sequentially, if you look over third quarter and to this quarter?

Brandon Beaver

Joe, I will answer that. Since January, we have added four additional field and support sales folks, so beginning January of this year, we had six, up to 10 at this juncture.

Joe Munda - Sidoti & Company

Okay. Few more questions here, helpful. David, can you walk us through the third party burn business, and how you come across that business, how you're soliciting for it, as well as some of the economics involved?

David Tusa

We have talked about this over the last couple of years, with the third party burn, with a significant portion of our [indiscernible] are being treated at Daniel's facility, it really frees up significant capacity at our treatment facility. So over the last six, nine months, we have really turned up the marketing, and this turned into sales. There is a real demand out there for third party treatment and third party incineration services. So we market that through our marketing department and offering many services to many markets and hope to see that grow. It’s a very profitable business, and its one that we think we can continue to grow, and I have always said, Joe, you have heard us say this before, we want to turn that treatment facility into a profit center instead of a call center, and I think we are will in our way to doing that.

Joe Munda - Sidoti & Company

Okay. Two more real quick, I guess a question for Diana. In terms of gross margin, what is driving the expansion here in the quarter, just better utilization? Can you give us some sense of what is really driving the gross margin expansion?

Diana Diaz

It's just the leverage that we get with higher revenues. We have said before that our fixed costs -- there is a fixed cost component and cost of sales that's about $1.1 million per quarter, and the product costs range from about 48% to 50% of revenue, and if we look at that model compared to our revenue for the quarter, we are right in line with those estimates, at 36%.

Joe Munda - Sidoti & Company

Okay. That's very helpful. And then I guess my final question for you David, you're sitting now on $16 million in cash, no debt, any plans, acquisitions or dividend -- any idea what we could expect from the use of cash?

David Tusa

That's a great question Joe. We have actually, and you have heard me talk about this; we do look for expansion opportunities in a number of different ways. One, we look at launching of new products, new services; and for the first time, over the last couple of quarters, we actually have looked at some acquisition opportunities. Now for an acquisition opportunity to make sense, it has got to be a product or service that can be sold into our existing as well as prospective customer base. Products and service that makes sense. Something that can be cross-sold.

The other thing is, it's got to have low integration risk, we are not going to jeopardize our organic growth business, our core business, and go out there and do something that doesn't make sense. So it has to be easily integratable, little to no integration risk, products and services that can be sold into the existing as well as prospective customer base, and ones as well that generate the kind of margins that we have begun to expect. So we have looked, and we are looking at some opportunities and we think that we are well positioned with a significant cash balance, and no debt to be able to act on these, again if we think it makes sense.

So we are working on some things, and if we do get some clothes, you will be one of the first to hear about it.

Joe Munda - Sidoti & Company

Okay. Thank you.

Operator

Thank you. Our next question is coming from Ryan Daniels of William Blair. Please proceed with your question.

Nick Hiller - William Blair

Hi this is Nick Hiller in for William Blair. Good morning and thanks for taking my questions. Just one quick question on the other [ph]partnership, I mean, is that something you focus on selling to existing customers or is that something you'd look at retailers, or maybe even a consumer focus?

David Tusa

It's really for existing and prospective customers, and we have just started to market that. We think it's an excellent complementary service offering that our existing and prospective customers could have a significant interest in. So we are just starting to market that and to sell that, and to hopefully, going forward over the next couple of few quarters, we will be able to give updates on it.

Nick Hiller - William Blair

Okay, great. Thanks. That's all I had.

Operator

Thank you. (Operator Instructions). Our next question is coming from Brian Butler of Stifel. Please proceed with your question.

Brian Butler - Stifel

Good morning. Thanks for taking my questions.

David Tusa

Good morning.

Brian Butler - Stifel

First, on the Daniels partnership, can you just give kind of a quick status and maybe update on maybe where that stands, and any thoughts on some larger contracts maybe coming in the next 12 months? I mean, obviously it has been beneficial, but it still seems like the long selling cycles seems like there are still some larger ones out there?

David Tusa

There really are. I mean, when you look at our pipeline of opportunities on the larger deals, the national deals, virtually all of them have some element of the need for the pickup, to be integrated with the mailback. We worked closely with Daniels everyday, and taking quotes and working with them to put the best solution together for the prospect. Brandon, if you looked at the pipeline, and you look at the quality of these sales reps, by the way, I understand the pickup is extremely. We still see that as an integral part of the growth.

Brandon Beaver

Absolutely.

Brian Butler - Stifel

Any way to quantify it? I mean, obviously, its kind of a wide range, but just trying to think about -- the partnership again has been -- it appears to have been successful. Maybe that's another way to say it is, any sense on what kind of the contribution has been in 2014, and what it might look like?

David Tusa

We generated probably incremental business of probably $1 million, $1.5 million or so as a direct result of having that alliance with Daniels and being able to [indiscernible] both the mailback and the pickup, as the best solution for the customer. I will just say that, there is many-many opportunities out there that are much higher than $1 million, to $1.5 million, that we believe we have the opportunity to close.

Brian Butler - Stifel

All right. That's great. That's very helpful. Then on the pharmaceutical piece of the business, I think you finished the year with just around $3.7 million in revs from that; is that a good base for the current group of programs that you have in place for moving for your fiscal 2015? And then, the new -- six new programs over the next 18 months, is that still another $2 million to $3 million of incremental revenues on top of that?

David Tusa

Right. What do we think Diana, what did we say?

Diana Diaz

$2 million to $3.5 million for those six programs, and these programs that might come up later.

David Tusa

Right. We got a couple of launching in the next two quarters, and then we have got four more that will launch roughly about a year after that. I will put it this way Kevin [ph], I do think it’s a good base, but if you kind of look at fiscal year 2015, we think that we probably have the opportunity to grow that business by, what do we say, 30%/

Diana Diaz

Yes.

David Tusa

Probably about 30% over the next year. So it could be high, if we landed some more deals between now and then, but we think we are pretty safe with 30% increase year-over-year in that market; and by the way, every time we land one of these deals, then you are further going up the pipeline. We actually have some deals that will fall into the 2016 fiscal year -- 2016 quarter. So we are excited about that. We believe we were the key innovator in helping pharmaceutical manufacturers launch these programs. So we stay remain focused on it, believe that that's going to be -- continue to be a growth market for us.

Brian Butler - Stifel

Okay, great. And then this year, you were just at breakeven, call it $26.5 million in revs, just under breakeven I guess. With the new salesforce initiatives, in fiscal 2015, did that number then move up, I guess, by about $0.5 million, so is it really now $27 million or $27.5 million is where breakeven is, and again, I think Diana mentioned that operating leverage is still kind of that 45% to 50% on the revenue above breakeven?

Diana Diaz

Right. We are pretty much at the breakeven level this quarter, $7.5 million in revenue.

David Tusa

But you know what's interesting -- not interesting, but what's important to note though, Brian, is that we are focused on revenue growth, and we re focused on sales and we are focused on marketing. And what we want to do is, is to invest where appropriate SG&A dollars into sales and marketing. We want to drive revenue. I mean, if you look at the year, if you look at this past year, what did we do? The revenue was up 23% and the SG&A was up 5%. So we think we had the opportunity to continue to expand that operating leverage. But we are going to be smart. We are going to spend money where its appropriate, and its going to be focused on sales and marketing. But at the end of the day, we want to drive revenue growth. We know that profitability is going to be there, but in the meantime, we need to make sure that we are spending what's necessary to drive continued revenue growth.

Brian Butler - Stifel

All right, great. Thank you very much.

Operator

Thank you. And our next question is coming from Kevin Steinke of Barrington Research. Please proceed with your question.

Kevin Steinke - Barrington Research

Good morning.

David Tusa

Good morning Kev.

Kevin Steinke - Barrington Research

Yes. So you are talking now about six new pharmaceutical manufacturer programs, I believe last quarter it was five. So I guess, we can assume you added a new one recently, or there was a new deal recently signed?

David Tusa

That's correct.

Kevin Steinke - Barrington Research

Okay. And that's, I guess, it sounds like roughly $0.5 million annual run rate is the way to think about it?

David Tusa

Well that's on average. Actually Brandon -- we landed that one recently. That's going to be the one that's going to fall into the second half of the calendar year. So that's why we have two of them that we will be launching in the second half of the calendar. They are on average, about $0.5 million, but some could be smaller, some could be significantly larger.

Kevin Steinke - Barrington Research

Okay, that's great. I think you made a comment, and I may have missed this, about new business being up 41%, is that correct?

David Tusa

We said that customer billings were up for the quarter, 46%, is that what you --?

Kevin Steinke - Barrington Research

Yeah, okay. No, I must have missed that. Okay. In terms of the retail market, you saw a little bit of a shift in timing in the flu shot business. How significant of a pull forward was that, just trying to get a sense of how we should think about the next quarter in that business?

David Tusa

Well, let me answer it two ways; we had about $700,000 that moved to the June quarter from the March quarter. But if I am looking it from a big picture perspective, we really try to look at these things on an annual basis, trailing 12 and then the forward 12. From a forward 12 standpoint, the way that we look at these retail businesses, we are pretty -- we think we are pretty safe in saying that that should increase by 20% or so by fiscal year 2015. And again, because of the lumpiness, and because of the mismatching sometimes of the orders, I think that's the best way to look at it.

Kevin Steinke - Barrington Research

All right. Great. Thanks for taking my questions.

Operator

Thank you. Our next question is coming from Craig Hoagland of Anderson Hoagland. Please proceed with your question.

Craig Hoagland - Anderson Hoagland

Hi, I was wondering, do you have -- the professional growth rate was very strong for the fiscal year. Would you expect that to continue in the high 30s, or do you think that might moderate some going forward?

David Tusa

Well, that's one of my favorite markets, because we are somewhere between maybe 1% or 2% in the $600 million plus market. The 38% was good. I think we have the opportunity to generate even greater growth. I mean, this is an area where we can save the prospect significant dollars and that we can introduce a system that's very operationally efficient. The key there is getting the customers. So what Brandon and his crew are doing, are going out for large national accounts, and we do have a number of large national accounts, and then we have our inside sales group that are dialing and smiling, and going after the individuals, while we have a marketing initiative with Dennis and his crew, that are using different marketing and internet based initiatives, to drive growth as well. So its really kind of a three-pronged attack.

So while 38% is good, I can just tell you, that was probably below what our internal expectations were.

Craig Hoagland - Anderson Hoagland

Okay. And then on gross margin leverage, this year, you picked up just under 400 basis points on a $500 million incremental revenue. Diana, would you expect that kind of leverage to continue on the next $5 million of revenue?

Diana Diaz

Well I think we just have to go back to our model. Each quarter has got about $1.1 million and fixed costs that are in cost of sales and in the product cost ranges from 48% to 50%, and so as we look going forward, we would expect our margins to be in the high 30s, from a percentage basis when you do the math.

Craig Hoagland - Anderson Hoagland

Yeah. So its really leveraging that $1.1 million?

Diana Diaz

It really is.

Craig Hoagland - Anderson Hoagland

[Indiscernible]. Okay, thank you.

Diana Diaz

You're welcome.

Operator

Thank you. Our next question is coming from George Walsh of Gilford Securities. Please proceed with your question.

George Walsh - Gilford Securities

Thank you. Brandon, I had a question, just a little more philosophical I guess, as you look at the company. But primarily, the mailback service is marketed to the service provider in home healthcare, their professional market. But the pharmaceutical manufacturing is where you are effectively bundling with the product itself and OEMs so to speak. How do you see the markets developing for this? Is there more bundling opportunities? Can you work with larger entities to do more of that? Do you think the focus is really -- you go after the one that's providing the healthcare service?

Brandon Beaver

George, I look at it a couple of different ways. We look at our pharmaceutical markets as working directly with the actual payor, working directly with new injectable drugs coming out, which obviously facilitate down to the patient level. Does that mean that we'd not work through different avenues? Certainly not. We are going to explore all opportunities, that would lead us back to ultimately that home injectable patients.

Regarding other additional markets, you know, just seeing through the financials, we obviously work through distributor relationships, as well as directly to some of our payors direct. So its across the board really, but I will tell you from a sales standpoint, we truly uncover all rocks, live through all different ways that make sense for the organization.

George Walsh - Gilford Securities

Yeah. Say something like the -- because I am just curious as to how this works, say like the mailback for unused drugs, something like that, is that something where you could bundle, like in Cardinal Health or something like that, does that make sense or it doesn't work that way?

David Tusa

Right now George, with products like the unused medication, that's used primarily in the long term care, the long term care industry, some mixed in on the retail side. But right now, there probably isn't -- at least right now, a lot of opportunities to bundle those.

Now that could be in the future, and we think that there are potential opportunities to expand that unused medication business.

George Walsh - Gilford Securities

Okay. All right. Anything with the injectables, relative to that also, with the distributor?

David Tusa

We have looked at that. Its tough, its tough to do something like that. But we have looked at that. You know George, it all gets down to resource allocation, and we want to go after the opportunities; one, where we think we have the highest probability of sales, the highest revenue, and the highest margins. So you're taking resources away and going -- looking at some of these other avenues. So you potentially have an opportunity cost associated with that, with the deal that you could have closed a little bit more straight-forward.

George Walsh - Gilford Securities

Its just a matter of what's the most efficient for you. Okay. I was just curious about that. All right. Thank you.

David Tusa

Thanks George.

Operator

Thank you. At this time, I'd like to turn the floor back over to management, for any additional or closing comments.

David Tusa

Thank you everyone for joining us. We appreciate the support of the company, and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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