Sharps Compliance's (SMED) CEO David Tusa on Q2 2016 Results - Earnings Call Transcript

| About: SHARPS COMPLIANCE (SMED)

Sharps Compliance Corp (NASDAQ:SMED)

Q2 2016 Earnings Conference Call

January 27, 2016 11:00 AM ET

Executives

John Nesbett – Investor Relations, IMS

David Tusa – President and Chief Executive Officer

Brandon Beaver – Senior VP-Sales

Diana Diaz – Vice President and Chief Financial Officer

Analysts

Joe Munda – First Analysis

Kevin Steinke – Barrington Research

Brian Butler – Stifel

Craig Hoagland – Anderson Hoagland

Operator

Greetings and welcome to the Sharps Compliance Second Quarter 2016 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] Also as a reminder, this conference is being recorded.

I’d 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 thank you for calling in. On the call today, we have David Tusa, the Company’s President and Chief Executive Officer; Diana Diaz, Vice President and Chief Financial Officer; and Brandon Beaver, Senior VP of Sales.

David will review the Company’s business operations and growth strategies, and Diana will review the financials, Brandon will discuss the Company’s sales initiatives and related activities. Immediately following their formal remarks, we will take questions from our call participants. If you are listening via webcast, please note that you have the ability to submit questions through the internet.

As you are aware, we may make some forward-looking statements during the formal presentation and in the question-and-answer portion of this teleconference. These statements applied 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 SEC. These can be found at our website or at sec.gov.

Okay, with that, I will now turn the call over to David to begin to review and discussion. Go ahead, David?

David Tusa

Thanks, John. Good morning everyone and welcome to our second quarter fiscal year 2016 earnings call. The December 2015 quarter was highlighted by record customer billings of $10.5 million with growth in most of our markets including pharmaceutical manufacturer, professional, assisted living and home healthcare.

Now, the one sector that lag the December quarter was our retail market, which was driven significantly by two season related business. As many of you have seen, the flu season and weather across the country in the fall of 2015 has been very mild. The flu season historically peaks in December, but this year’s flu season has not yet peak and some expert says the flu season may not peak until next month or even later.

So if you look historically, if you look at the calendar year 2014 flu shot season for us, we generated about $6 million – $6.1 million in customer billings. We had anticipated about $7 million for the calendar year 2015, which is a 15% increase. And we believe 15% was reasonable in light of the historical annual increases in this business from about 23% to 36% over the last few years.

But because of the mild weather and the delay in the season, we generated only $5.2 million in the flu shot business in the calendar year 2015, which is kind of how we’d look at the flu shot season. That’s an approximate $2 million shortfall from our internal budgets of about $7 million. So that just kind of gives you $1 impact on the effective disclosures at the flu shot season.

Now, moving forward, we’ve made significant progress with our strategic initiatives in the December quarter. First, we broadened our route-based pick-up capabilities with an additional acquisition in the Northeast. Second, we advanced our relationship with the government sector with the execution of the Blanket Purchase Agreement with the Veterans Administration. We have begun to see the impact on revenue from our two recent acquisitions: Alpha Bio/Med and Bio-Team Mobile, and believe we should begin to see the impact on the government related revenue from the BPA with related orders as early as this week.

Gross margins, gross margin were lower than what we had expected. We had few things happened. One, we had about $600,000 of revenue from a legacy Pharmaceutical Manufacturer patient support program. It’s a split revenue model that doesn’t have a lot of margin or a little no margin upfront. The margin is generated in the back-end side.

So that’s an significant portion of revenue at low margin. So that reduce the overall gross margin. And we also had about $200,000 in additional operating cost related to the treatment facility in Texas. The good news of the majority of these – the additional expenditures are not expected to recur for somewhere between 15 months and 36 months, but our normalized margin without the impact of these items would have been closer to 39%.

So let’s review a bit more about the individual markets. Pharmaceutical manufacturer billings grew 93% to $2.5 million in the second quarter. As we filled orders for new inventory builds related to four patient support programs. We expect to see continued strength from this segment as we anticipate launching two additional patient support programs for new drug therapies over the next three to four quarters.

Our professional market grew 9% or $1.9 million in the second quarter as we continue to rollout sales and marketing initiatives around our multiple solution offerings: the Sharps Recovery mailback system and our new route-based pick-up service. Our focus is on the small to medium quantity generator, such as clinics, dentists, vets, surgery centers and other healthcare professionals and facilities, which represent a recurring revenue base for us.

We believe our comprehensive service offering with both the mailback system and the route-based pick-up offers our customers choices, cost savings, and operational efficiencies. The government billings increased by about 61% for the quarter. For the trailing 12 months, we generated government billings of about $2.2 million. It was driven by both the TakeAway Envelopes and the MedSafe solution both designed for the proper disposal of unused medications including controlled substances.

And more about the Blanket Purchase Agreement with the VA, we – as I mentioned, just earlier we were advised that we’re going to start receiving the orders related to that Blanket Purchase Agreements this week. So, the envelopes – we will provide the envelopes to healthcare facilities – VA healthcare facilities across the country. And the BPA allows, it does not obligate, but it allows the VA to purchase up to $7 million per year, of TakeAway envelopes over a five year agreement period. The BPA is structured as a base year plus four option years. There is no guarantee of volume and the BPA may be cancelled by either party with 30-day written notice.

Now the TakeAway envelopes need all the requirements of the DEA’s new Secure and Responsible Drug Disposal Act for the proper and cost effective collection, transportation and treatment of consumer dispensed unused medication including controlled substances. So while we didn’t see significant government orders in the December quarter, we do believe we should see an increase in the government sector as early as the March quarter.

Home Health Care and Assisted Living billings increased 19% and 14% respectively. Home Health Care billings increased due to the timing of distributor orders. Assisted Living billings benefited from an increased sales focus on this market including the sales – the sales of our route-based pick-up service. The retail market billings actually decreased 1% to $3 million in the second quarter, primarily due to the decrease of $700,000 in flu shot business. It was partially offset by about $600,000 in sales of our TakeAway Envelopes to the retail sector.

Looking at the trailing 12 month, retail market billings increased 8.6% to $8.5 million including $1.2 million increase from the sales of the TakeAway Envelopes. So despite the delay in the peak flu season, we remain confident that the retail market will continue to drive our long-term growth as customers increasingly go to alternative sites for flu shot and other immunizations.

Now in addition to driving organic growth and launching new products, we continue to explore additional acquisition opportunities that fit our strategic goal and focus on capturing recurring revenue from our core customer base of small to medium quantity generators. In December 2015, we announced the acquisition of Bio-Team, which further enhances our route-based pick-up offering. It strengthens our presence in the Northeast.

Additionally, during the December quarter, we made excellent progress with our treatment facility and distribution warehouse in the Northeast, which we expect to be operational by as early as this summer. Our unused medication solutions including the TakeAway Medication, Recovery System and the MedSafe as well as our new route-based pick-up service continue to gain traction.

As it continue to contribute success in our inside and online sales channel, which grew by 12% in the second quarter and 19% for the fiscal year day period. Finally, we proud ourselves on the ongoing development of new value-added service offerings, designed to solve problems for our customers while saving the money. We’re working on a couple of new exciting offerings that we believe could be launched in the calendar year 2016.

And with that, I’ll turn the call over to Brandon, who will give you an update on our sales initiatives. Brandon?

Brandon Beaver

Thank you, David. As David mentioned, we saw solid results from the pharmaceutical manufacturer, home health care, professional, governments, and assisted living markets this quarter. Retail is down as already discussed due to warmer weather throughout the U.S., which has delayed the peak of the flu season.

We’re pleased to deliver significant growth in the pharmaceutical manufacturer segment to patient support program inventory builds. Our relationships in this market remain very strong because our partners recognize the value of our unique solution, which is not just the disposal solution for patients in the home setting, but also provides an opportunity for pharma branding and data generation related to the patient behavior and medication adherence.

While we sometimes experienced inconsistencies in the order patterns in this segment due to the program timing, we’re encouraged by the many opportunities we’re seeing for pharma, including programs for new self-injectables, new drug indications, as well as higher patient counts.

Growth of 9% in professional market reflects our continued focus on educating the physicians, dentists, vets, and other health care providers, who will make up the small medium quantity generators sector on the financial and operational benefits inconvenience of the Sharps Recovery System as well as of our new route-based pick-up service. This professional sector represents a recurring revenue model, and once we illustrate the cost savings and ease of use in our solutions, we increased our opportunity to capture these potential customers.

The addition of the route-based pick-up service provides our sales team with a net value-added service as well as an offering in addition to the mailback. Our sales team is well trained and qualified on both the mailback as well as the route-based solutions. Offering the service alternatives to our customers allowed us to develop the best solution that not only saves money for them, but also fits their operational needs.

Let’s go over to our assisted living market. Our assisted living billings, show continued strength in the second quarter with 14% growth, which is as a result of dedicating our resources to closing new customer deals, converting untapped opportunities and also reflect the appeal of our new route-based pick-up services, which is very well suited for this market. Our sales team is dedicated to drive customer awareness of Sharps integrated and customizable portfolio of waste management solutions including medical with both a mailback and route-based pick-up pharmaceutical, hazardous, and universal waste, and patient dispensed unused medications.

As of today, our sales team consists of five field sales personnel, 15 inside sales personnel, and six sales support personnel for total team count for 26 employees. It’s an experienced team focused on executing on new opportunities, onboarding new customers and accelerating our closure rates.

With that, David, I’ll turn it back to you.

David Tusa

Great. Thanks, Brandon for the update. And I’ll ask Diana to cover the financial section.

Diana Diaz

Thank you, David. During our second quarter, revenue grew 15% to $10 million as compared to $8.7 million in the second quarter of last year. During the second quarter, the GAAP adjustment, which is the difference between customer billings and GAAP revenue, had a larger than normal negative impact of revenue. The GAAP adjustment reflected larger deferrals related to a higher level of billings for the quarter as well as deferral of significant prepaid amounts related to a pharmaceutical manufacturer patient support program.

Gross margin was 33% in the second quarter of fiscal 2016, compared to gross margin of 37% in the second quarter of fiscal 2015. Gross margin in the quarter was adversely impacted by about $600,000 in revenue from the legacy pharmaceutical manufacturer patient support program that have little or no upfront margin, as David described earlier, and by about $200,000 in traditional operating costs related to the Company’s existing treatment facility, the majority of which are not expected to reoccur for 15 to 36 months. The normalized and expected gross margin for the quarter was 39%.

Selling, general, and administrative expense, or SG&A, increased to $2.6 million for the quarter and declined to 26% as a percentage for sales compared to second quarter of 2015. SG&A for the second quarter fiscal 2016 included $100,000 of acquisition related costs associated with our acquisition of Bio-Team Mobile in December of 2015. Without these acquisition related costs, SG&A increased 4% compared to the second quarter of fiscal 2015. Exclusive of any potential acquisition related costs, we expect SG&A to be about $2.5 million to $2.6 million per quarter for the next three quarters.

The Company reported operating income of $0.7 million in the second quarter, consistent with operating income in the second quarter of fiscal 2015. Sharps reported net income of $0.6 million, or $0.04 per basic and diluted share this quarter, compared with net income of $0.7 million, or $0.05 per basic and diluted share, in the second quarter of fiscal 2015. EBITDA for the second quarter of fiscal 2016 was $0.9 million as compared to EBITDA of $1 million in the same quarter of last year.

Now, let’s take a look at the highlights for the six months ended December 31, 2015. Revenue increased 14% to $17.9 million and customer billings increased 15% to $18.5 million. Pharmaceutical manufacturer billings grew 40% to $3.8 million, primarily due to inventory builds for new program. Last quarter, we reported that we estimate revenue from new programs including the two programs to be launched over the next three to four quarters to reach a total of $4 million or more on an annual basis was fully rolled out. We’re still on track to reach those revenue levels.

Home Health Care billings increased 15% to $4 million in the first six months of fiscal 2016. Government billings increased 149% in the first six months to $0.7 million as compared to $0.4 million for the first half of fiscal 2015. This increase in government billings is largely due to increased orders for the company’s news unused medication disposal solutions including the MedSafe solutions and TakeAway Medication Recovery System envelopes.

With these – most of these solutions have been approved for purchase and use by several government agencies. Professional billings increased 13% to $3.6 million and Assisted Living billings increased 15% to $1 million. The first half of fiscal 2016 gross margin was 35%. SG&A expense increased $5.2 million in the first six months of 2016, an increase of 9% over the prior year period.

SG&A for the first half of fiscal 2016 includes $0.2 million of acquisition related cost associated with our acquisition of Alpha Bio/Med in July 2015 and Bio-Team Mobile in December 2015. Without these acquisition related cost SG&A increased 6%, compared to the first half of 2015, as a result of ongoing investment in sales and marketing initiatives. The Company recorded operating income of $0.9 million for the first half of fiscal 2016, compared to operating income of $0.7 million in the same prior year period.

The Company reported EBITDA of $1.3 million in the first half of fiscal 2016 as compared to EBITDA of $1.1 million in the first half of fiscal 2015. Net income for the first six months of fiscal year 2016 was $0.8 million or $0.05 per basic and diluted share, compared to net income of $0.7 million or $0.04 per basic and diluted share in the same prior year period.

Our balance sheet remains solid with $14.5 million of cash and cash equivalents at December 31, 2015 and no debt. At December 31, 2015, working capital, stockholders equity and total assets were $18.8 million, $24.6 million, and $31.7 million respectively. Inventory of $3.8 million at December 31, 2015 is higher than the balance of June 30, 2015 of $2.7 million. The increase in inventory is a direct reflection of growth in the business as well as preparation for government envelope orders.

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

David Tusa

Great. Thanks, Diana. Just a couple more comments before we turn it over to the Q&A. We continue to focus on the four major components of our growth strategy, which includes driving – continue to drive strong organic growth in all of our key markets, introducing new and value-added products and services, capitalizing on large government-related opportunities and closing more acquisitions that complement our existing service offerings and enable us to further focus on core, recurring revenue from the small to medium quantity generator market.

Now, in addition to executing on the broader goals, we are making excellent progress on the expansion of our infrastructure to the Northeast and it will include both the treatment facility and our distribution, it’s in our warehouse. The Northeast is a strong and growing region for us and we believe the expansion, which are expected to be a operational as early as the summer will better position us to serve our customers and facilitate growth of our route-based service capabilities.

Our team here is laser focused on providing our customers, existing and new, with the most comprehensive and cost saving waste management solutions, while driving the revenue and billings growth and of course profitability. We’re executing well against our goals for our strategic growth and we look forward to updating you after the March 2016 quarter.

So with that operator, let’s open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Joe Munda from First Analysis. Please proceed with your question.

Joe Munda

Good morning, David, Diana, and Brandon. Thanks for taking the questions.

David Tusa

You bet. Good morning.

Joe Munda

David, I want to start off on your prepared remarks, company believed adversely impacted by revenue of $2 million on the internal budget. Based on the comments that you just gave to us, let’s say we have a flu shot season peak this quarter and you start to see the government revenues that you expect. Would it be safe to assume that $2 million pulls through to this quarter that was a shortfall this past quarter?

David Tusa

We judge your question. We don’t know yet. We just know that there has been a delay in that – in the season. Some of that could come in the March quarter, it may not. It’s really too difficult to tell at this point. But that that business for us has been solid 20% to 30% increase a year over many, many years. It’s an unusual season. So, we’re hopeful that we could see some of that in the March quarter. We just on to the – any visibility on that right now.

Joe Munda

Okay. And then on the gross margin front, the $600,000 revenue that you recognized no margin on – on the pharma support legacy program. Is that going to – I guess you said that’s back-end load as far as the margin when its realized. Are we- I mean, when can you expect to see the benefit from that legacy pharma program?

David Tusa

That will turn that – that margin will be recognized what was the calendar year?

Diana Diaz

Great.

David Tusa

What was the calendar year 2016 as those units come back from the patients at home? So, we’ll get that margin and it will just pass over the next four quarters.

Joe Munda

Okay. And then, I guess, a couple more here. The acquisitions that you did, can you give us some sense of the contribution possibly on top-line and the cost related to them that have been incurred in the quarter if any?

David Tusa

Sure, please go ahead, Diana.

Diana Diaz

Sure. But the quarter, for the quarter ended December, which included three months for Alpha Bio/Med and half month for Bio-Team Mobile, our revenue exceeded our estimates for growth. And our margins were above our expectations that we had in our pro forma. And so, the revenue for the quarter actually came in about 42% higher than the historical revenue for these locations. So, we’re feeling really, really good about the…

David Tusa

And it was about $220,000…

Diana Diaz

Yes, $220,000.

David Tusa

$220,000 in revenue and of course we’re just hitting hard and we’re really pleased to see that what we should have to do is working and acquiring these companies and utilizing our marketing resources and integrating them into our company and driving growth. So we’ve been very pleased so far and it’s early on. And when we report the next couple of few quarters, we will be able to give some more color and I would expect to see a significant growth rates in that business.

Joe Munda

Okay. And then I guess my final question and then I will hop back in the queue. David in your prepared remarks, you just talked about new product offerings possibly coming. I mean, can you give us some sense of where or what segment that – that would be a focus in as far as any product offerings are concerned?

David Tusa

It’s probably a little bit too early, but we are excited of a couple of new markets. They’re mailback related products, new products. And I will just say they’re designed to solve a problem for a significant sector out there in the healthcare world. And we’re good at solving problems and we’re really good on developing mailbacks and solve problems. So, we’re working on a couple of them and we’re hopeful that that’s something that could potentially even impact 2016.

Joe Munda

Okay, thank you.

Operator

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

Kevin Steinke

Good morning everyone.

David Tusa

Good morning, Kevin.

Kevin Steinke

So, yes, it sounds like obviously you’re optimistic about the Northeast region and that’s a strong and growing region for you as you mentioned. Just wondering in terms of the route-based capacity, do you feel like what you have in place now after these two acquisitions is sufficient for at least some period of time? And you’ll take some time to grow into that route-based capacity or do you feel like you need to add more in the near-term to service the customer base you have right now?

David Tusa

Well, it’s a really interesting – it’s a really interesting business. And right now we’re just talking about five or six states that they’re at right now – well, I would say five states, we’ll ultimately serve ten states up in that Northeast region. And really that’s just permitting the needs to be completed out there. But the way to expand the business is actually,we will have the treatment facility out there.We have the two existing acquisitions,but the way to expand that is to just buy more trucks.

So, we think that with those two – and then that maybe – and that went up in the Northeast,but even one of those two that with investing more in trucks and getting out permits in additional states that will ultimately able to – maybe evenby the end of this calendar year, we servicing up to 10 states up in the Northeast. So then having our treatment facility up in that area as well will be critical to make in that as efficient as possible.

Kevin Steinke

Okay, that’s very helpful. I wanted to also ask about the Blanket Purchase Agreement with the VA, as I understood maybe initially even with this agreement, the VA was still going to take a little time maybe to evaluate how extensively they wanted to rollout this program with you? I mean, it sounds like have they decided to do at nation-wide? Or are they still kind of in an evaluation phase of how extensive this program is going to be?

David Tusa

Well, the BPA came with a very complex statement of work. It’s not just a traditional program that put an envelope in the boxes of the VA. It’s pretty comprehensive. And that’s taken to work, contemplates a nation-wide program. So, what they’ve been doing since the November [indiscernible] is working internally on the ordering process and different protocols that you would be put in place between them and us and that’s now been completed.

So we were told we’re going to start receiving the actual orders against the BPA this week. So the way you think about that is the orders will come in and there is probably up to 120 or 100 different facilities that will be – VA facilities will be shipping directly to. So that – so they can get those envelopes to the veterans as efficiently as possible and as soon as possible.

So, we’ll say – let’s keep this March quarter pass us and let’s see what kind of orders come in and the volume. We’ll have a lot better – I think we’ll have a lot better visibility after the March quarter on expectations for the rest of the year. But we’ve been very pleased with them, we worked well with them. We have direct relationship with them. We worked well with them. And we’re excited about shipping these envelopes out to those multiple locations.

Kevin Steinke

Okay, great. You mentioned 100 to 120 facilities, I guess, they’re potentially could be an opportunity to ship – shipped to a greater number of facilities. Is that correct?

David Tusa

I think, these are the ones that they’ve identified that would be the best to most efficiently get the envelopes to the veterans. So, that is just the channel, that’s the unused. We’d love them to order – and we not – I can’t guarantee it, but it would be – would be great in the order of 7 million of the dollar towards the envelopes and they best know how to distribute them to get the maximum impact.

Kevin Steinke

Okay, okay, that makes sense. Okay, Diana, just a quick question here on just the tax in the quarter. Every few quarters you have a little bit of a spike up in the income tax expense. I don’t know if there is any – what the explanation is were there, what we should think about for the rest of the year?

Diana Diaz

Well, we’re recording on our effective tax rate that we have at the end of last year just around 8% and it’s primarily state income tax, which we owe even though we’re in an NOL position while we’re releasing the valuation allowance with the income. So, I think, probably that level until our NOLs are used up, would be a decent estimate.

Kevin Steinke

Okay, fair enough. That’s all I had for now. Thanks for taking my questions.

David Tusa

You bet. Thanks, Kevin.

Operator

[Operator Instructions] And our next question comes from the line of Brian Butler from Stifel. Please proceed with your question.

Brian Butler

Good morning. Thank you for taking my questions.

David Tusa

Good morning. How are you doing?

Brian Butler

Doing well. How about yourself?

David Tusa

I’m doing great.

Brian Butler

Let’s start just back on the retail side on the flu shot. I mean, it looks like the flu doses dispensed to date or kind of on par with where they were last year based on the CDC’s reporting. But, I mean, first half versus – first half 2015 versus your first half 2016 seems like orders for disposals are definitely lower. Can that be made up in the third quarter 2016 that kind of shortfall?

David Tusa

Well, it’s really – it’s a great question, Brian. We’re trying to figure that out. I mean, we have the product available to facilitate whatever spillover that that may occur. But I think it’s going to just have to do a lot with severity of the flu shot season and more folks get back out there and start getting flu shots. You really didn’t see much in the media this year about reminding people to get their flu shot and about the dangers of the flu. So, I guess, it’s got to be an event. There’s got to be a significant increase in flu. Well, there’s got to something that’s got to happen to be able to drive people to get more, more flu shots. But to be honest with you, we’re really just don’t have a lot of visibility on that. Right now, we only will when we start to receive more orders from the customers.

Brian Butler

So, in the first month of the third quarter for you guys, you haven’t seen this trend really changed at all. You’re still seeing the kind of what that you saw on the second quarter and kind of continue into January here.

David Tusa

That’s correct.

Brian Butler

Okay. And sort of those flu shots kind of coming back is kind of the growth rate for retail, really more in that 10% to 15% range or is this kind of the 15% to 20% that you guys target?

David Tusa

No, I don’t think. I think this has been a real anomaly. I mean, I’ve been here a long time at this company. I’ve seen a lot of flu shot seasons and it appears to me to be an anomaly. I think I’ve only seen this one-time before where there was a delay in the flu shot order, it was a mild flu shot season. So, no. I think it’s an anomaly and that I think ultimately that it would get back on track. I can’t make any guarantees or promises, but I do think this is an anomaly.

Brian Butler

Okay. And then on the government side, clearly the orders were down sequentially from first quarter into the second quarter. Is any of that’s being driven by the fact that the new agreement was out there and there’s – were you getting push back or not push back maybe just communication that they were holding off until the BPA was kind of figured out?

David Tusa

Yes, that’s right. What they were doing is they’ve got the orders in the March and in the June quarters. And then they were working towards the BPA. So, they held off on September and December orders until the BPA was one completed and two that they have their internal ordering processes in place to begin to order the envelopes. So that’s happening this week. So we will – we should see the beginning of the orders this week, but yes. The last – the September is similar quarter were slow because they’re waiting on the contract.

Brian Butler

And that $2.2 million of trailing 12 month revenue, I mean, that should be that kind of the base and is everything going forward from we should see an upside from that as these orders kind of flow through.

David Tusa

I don’t know. I’m not going to guess. What I really like to see is these orders – the orders come in. I do know that they like to TakeAway envelopes and sign the contract on the TakeAway envelope for as much as $7 million a year. I also know they like the MedSafe and the MedSafe is included in that numbers as well. And we’ve done a pretty good job of getting the MedSafe adding to the VA half those of VA facilities and we understand they have an interest in more purchases of the MedSafe.

So what I’d like to see is I’d like to see strong orders for the TakeAway envelope and for the MedSafe. So I think we can’t make any promises or guarantees, but I think that the government sector now with the contract employees and now that we’ve got many MedSafes out there that has the opportunity to grow to a higher level.

Brian Butler

Who – on the government – from the government’s perspective who makes these decisions? This has been made by individuals at each of the 100 facilities that you’re talking with or is this more centralized?

David Tusa

It’s more centralized – it’s a centralized decision making process.

Brian Butler

But this is someone – or not someone, but I’m guessing more – couple people in the VA that decide that this is a number of mailback envelopes that we want to be sent out to everybody.

David Tusa

Well, that’s correct.

Brian Butler

And that’s funding – is that funding also done at a national level or is it funded out of each of the individual facilities?

David Tusa

No, it’s funding at a national level.

Brian Butler

Okay. And let’s see a couple more. Just on the pharmaceutical, the $3 million to $4 million of annualized revenues coming, that’s from the new programs that you’re going to put out over the next three to four quarters, is that correct?

Diana Diaz

It includes revenue from new programs that have already been in place plus the two new ones that are going to come on.

Brian Butler

Okay. So when I see the – when I think about the trailing 12 revenues, pharmaceutical being $5.9 million, is the three point – is that $3 million to $4 million on top of that? Or is that you’re going to see a pullback in the next quarter as the inventory builds slowdown or I guess rise and fall with the new orders?

Diana Diaz

The historical revenue includes over $2 million from new programs.

David Tusa

So, we have got another $2 million.

Diana Diaz

Yes, got another $2 million to go.

Brian Butler

Okay. So when I think about it on an LTM basis, there is another $2 million on top of this fig – or the $5.9 million that’s out there, that’s the right way…

Diana Diaz

Yes.

Brian Butler

Okay. And professional, how much of the professional was of the growth you saw in the second quarter was from acquisitions, is that something you can talk about?

David Tusa

Well, it’s actually spread between a couple of different markets.

Diana Diaz

Right. It spread over professional and assisted living, but it was maybe $100,000…

David Tusa

You will see 220 in total – see 220 in total, which is probably the split between assisted living and the professional markets.

Brian Butler

Well, I guess, what I was trying to get out was the professional growth was like 9% year-over-year in the quarter and some of that I am guessing is from acquisitions. So it just seems like the organic growth in professionals seems extremely slow in the second quarter. There’s something fundamentally that’s changing there? Or is this just kind of getting that acquisitions sorted out?

Diana Diaz

There’s a component of the professional market that’s distributor related and we did see a reduction in distributor orders during the quarter. It was not quite. It was apparent from the year-to-date period, but it was more – more apparent in the December quarter.

David Tusa

And these distributors [indiscernible] mentioned are ones that traditionally provide our systems for the flu business. So there is a portion of professional that that was negatively impacted by the flu as well. So when you kind of take that out, what was the number Diana, we kind of normalize and took that impact out, it was like what?

Diana Diaz

It was more like an 18% growth.

David Tusa

Right. So you take out the impact of flu and distributors are closer to 18%, but distributing – we strive to have it even higher – higher than that and hope to see even higher than that, but yes that was provided for a difficult comp.

Brian Butler

Okay. That’s very helpful. And then on the cost side, what drives the cycle of that 15 to 36 months of the $600,000 I guess – or I guess is it really $400,000 or – and the $200,000 of the operational stuff because that just non-recurring completely?

Diana Diaz

Right, so, a portion of the Carthage expenses, the treatment facility expenses were related to our annual testing, our annual stack testing, which was successful this year, and it allows us to wait another three years before another stock test. So that’s a big part of that component. And then there were some repaired and maintenance that would not have to recur for at least 15 months.

Brian Butler

Okay. And last one, our cost here is when you have the new facility finally up and running, is that going to be a big cost saver? And what’s the right way to think about that? Or is that just simply, it’s not going to have an impact on cost? It’s really just driving or help to drive sales.

David Tusa

What more it’s going to do? It’s going to be bafflers, right. It’s going to the distribution side, but it is going to help reduce cost because it’s going to lower our cost of distributing product. Our mailback products to customers up in the Northeast and probably the Midwest, so it will save there. It will also save in the sense that the business we’re doing right now, we’re using third-parties to trade our – our route-based businesses are using third-parties, third-party treatment facilities to process the waste. When we do it ourselves, it will be at a lower cost, so we’ll save money – we’ll save money there as well.

It’s also the opportunity to generate more revenue because in addition to the growing businesses, the facility will be big enough that will have the opportunity to actually process third-party waste for haulers and others up in that area. So that has the opportunity to generate revenue. But all in all, we think it’s going to be very important to driving growth in the revenue having control of our destiny by having our own facility up there, as well as too many cost savings.

Brian Butler

Any ability to make some kind of forecast on the magnitude, I mean, is a 10 basis points to 15 basis points kind of savings on cost or is it really more kind of like couple of 100 basis points?

David Tusa

We’ll say that one for when we announced the – that we secured all the permits and we’re fully operational. And we’ll have a lot better idea on those numbers. We won’t be able to share with you at that time.

Brian Butler

All right, well, thank you very much, very helpful. Thank you.

David Tusa

All right thanks Brian.

Operator

Our next question comes from the line of Joe Munda from First Analysis. Please proceed with your question. I’m sorry, Joe, are you there?

Joe Munda

Yes, I’m sorry. I was on mute. Just a few quick follow-up here, Brandon, I missed the sales force breakout, can you give us those numbers again inside sales versus direct reps.

Brandon Beaver

Sure. So as of today, it’s a five field sales, 15 inside sales, as well as six sales support on our personnel, so a total of 26. During the last 24 months, we’ve seen this just about doubled. So we’re very excited the trend is moving significantly, especially with our inside sales team as we continue to be able to offer route-based pick-up as well as our mailbacks.

Joe Munda

Okay, to Diana's comment about SG&A $2.5 million to $2.6 million for next couple of quarters here, are we assuming that you guys are not going to continue to hire any more reps or are you full at the moment as far as the hiring goes?

David Tusa

I’ll answer that Joe. I would say no, I mean, we certainly evaluate that, I mean, I’m looking at that weekly. But I would say, as we continue to look at the growth of the inside sales team members as they continue to get up to speed. We're looking at hiring, I would say, a number of bodies within the next couple of quarters. We're not stopping in that sense.

Diana Diaz

And that growth is contemplated and reflected in our estimates of SG&A going forward.

Joe Munda

Okay. Now as far as acquiring let's say another business would you acquire another business with reps, or is that an opportunity there, or you continue to prefer to do it you guys on your own?

David Tusa

Joe typically, the – at least from a holler standpoint, we go after hollers. Normally they're very low number of employees within these organizations mostly operators, the drivers, things like that. And so they really don't have a sales function other than just traditional marketing of websites and things like that. So we take a lot of that on, take some of that burden on and do that from Houston here. But we look at all options there could be holler out there that or a holler treatment that does have a sales personnel and we look at it on a case-by-case basis.

Joe Munda

Okay. So then I mean that leads me to assume that possibly inside sales is where you’re going to add bodies, right. I mean if you’re – if that’s the…

David Tusa

Yes. I would say yes to that. It’s really been affected and I think Brandon and his team has done a great job in training the inside sales folks to be able to quickly speck out an opportunity and offer the right solution that works best [indiscernible] the most money. You only have to ask four, five questions you can figure out pretty quickly if it’s a pick-up or if it’s a mailback or if it’s a combination there. So we've been really impressed with the ability of those folks to be able to do that.

So when you look at the way you want to hire people, you just can't go out and say let’s go and hire a bunch of people, you’ve got really bring in qualified folks that can deal with multiple offerings and that can close these deals. We're very excited about that initiative and we think that sales channel, I’ll let Diana, the inside of the online sales channel once was – we break that out as well. And it was strong [indiscernible]. For the quarter – all right, for the year-to-date period, the inside and online sales channel was up almost 19% and that’s good because that smaller deals, higher margin deals are ones that we’re seeing significant growth.

Joe Munda

Okay. That’s helpful. And then I guess my final question is, David, you talked about in your prepared remarks TakeAway Envelopes in the retail setting that seems to be new to me. Can you give us a little bit of color there? I actually saw the envelopes at CBS. So…

David Tusa

Right. We sell our envelopes in the retail sector. We sold them for years, because – but before it was the old envelope that didn’t except controls. But that was an order from our major retailer, right, it was a major – two major retailers that we received the envelope orders for the new envelope that one that expects the controlled substances. So that’s another channel for the envelopes in addition to the government business is the retail sector.

Joe Munda

So is the controlled substances envelope now in the retail setting?

David Tusa

Yes.

Joe Munda

Okay. Okay, thank you.

Operator

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

Craig Hoagland

Hi, just one. The home health sector seems to have stepped up nicely from maybe a $7 million annual run rate or something closer to $8 million. You mentioned that you had some good distributor orders in the quarter. My question is do you think that your effort is to grow share there by paying off or is this really just lumpiness that we’re seeing so far this year?

David Tusa

Brandon, where are you?

Brandon Beaver

I mean I would say we definitely have some decent orders from our distributors, do we expect it to see some of those going forward, certainly also we keep up with the trend. As David mentioned over a number of quarters, this has become a very difficult segment of our business. It’s very fragmented. I think we’ve done a very good job of holding the business over the number of years. As you all know we started in this business in home health side. Do I think that there is a significant growth opportunity here? I’d be remiss to say that I think it’s definitely got some opportunity, but right now we’re going to continue growing with – we got with our distributor model.

Craig Hoagland

Okay, thank you.

Operator

It appears there are no further questions in the queue. Management would you like to make any closing remarks?

David Tusa

Just thank you everyone for participating in the call. We look forward to speaking with you next quarter. Everyone have a great day. Thanks.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you.

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