Sharps Compliance's (SMED) CEO David Tusa on Q1 2016 Results - Earnings Call Transcript

| About: SHARPS COMPLIANCE (SMED)

Sharps Compliance Corp. (NASDAQ:SMED)

Q1 2016 Earnings Conference Call

April 27, 2016 11:00 AM ET

Executives

John Nesbett - IMS

David Tusa - President and CEO

Brandon Beaver - SVP, Sales

Diana Diaz - VP and CFO

Analysts

Matt Hewitt - Craig-Hallum

Joe Munda - First Analysis

Kevin Steinke - Barrington Research

Brian Butler - Stifel

Shawn Boyd - Next Mark Capital

Operator

Greetings and welcome to the Sharps Compliance Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.

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

John Nesbett

Good morning and welcome to Sharps Compliance third-quarter fiscal year 2016 earnings call.

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 company sales initiatives and related activities. Immediately following their formal remarks, we will take questions from our call participants. If you're 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 the question-and-answer portion of this teleconference. These statements apply to future events, which are subject to risks and uncertainties, as well as other factors that could cause the 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 with the Securities and Exchange Commission. These can be found at our website or at SEC.gov.

Okay, so with that, let me turn the call over to David to begin the review and discussion. Go ahead, David.

David Tusa

Thanks John, and good morning everyone, and welcome to our third quarter fiscal year 2016 earnings conference call.

Let me first start by saying that although the March quarter, is historically our weakest quarter, we were disappointed in the overall results, which came in below our internal expectations. So, what caused the shortfall? Well, despite the delay in the flu business that we experienced in the December 2015 quarter, we did not see any significant flu business or flu-related orders in the March 2016 quarter. We were hopeful that there would be a spillover effect, but it just didn't happen. Based on our internal projections, the mild winter and weak flu season cost us about $2 million in revenue.

Additionally, the level of TakeAway envelope orders from the VA related to our blanket purchase agreement were only about 100,000 in the March quarter. The launch of the program has been slow. We were hopeful for more orders, but the ramp-up has not yet begun.

Why? Well, a couple of reasons. One, the ordering system for the 125 VA facilities that are participating in the program has only been recently completed. Two, the program is just now scheduled to be communicated to the 24 million veterans in the country. So because of these two reasons, the ramp-up has been slow.

Now on the positive side, we did see growth in the pharmaceutical manufacture, professional, retail, and assisted living markets. And additionally, we are encouraged by the level of flu business related orders received for the June 2016 quarter. Now, what are we doing to get our revenues back on track? First, we are refocusing our efforts around our inside sales initiative, which impacts the professional and assisted living markets. We grew these two markets 28% and 23%, respectively, in the March quarter and believe with more focus, promotional activities, additional solution offerings, and cross selling initiatives we have the opportunity to grow at a much higher rate. We now have our marketing team working much closer with inside sales to accomplish the goals that I just mentioned and to make the necessary changes on a real time basis.

And while our field sales team chases larger opportunities, we're also working with them to focus on deals with shorter sales cycles and higher probability of closing near term. Second, we need more critical mass and we need it to help lessen the impact of unexpected revenue shortfalls, such as the $2 million reduction in flu-related business that we experienced with the weak 2015 flu season. To that end, we plan to continue our acquisition program, which is focused primarily on the route-based business.

So why the route-based business? Well, we started with about 600 route-based customers. It was our first acquisition in July 2015, and now we directly serve almost 2,100 customers with our Northeast and South operations. We also have contracts representing another 68 customers that we will begin to service over the next 30 to 60 days. So it is working. And by the way, the route-based service offering contributed revenue of $338,000 in the March quarter and $651,000 for the fiscal year-to-date period. The March quarter route-based revenue of $338,000 represents a good portion of the increase in the March 2000 (ph) quarterly billings for the professional and assisted living markets.

To lab is the service offering working? Well, we think we are unique in the sense that we are finding that a combination of the mail back and the pickup service creates a unique offering in the marketplace where we can customize the best solution for the customer, thereby increasing efficiency and saving money. So providing a choice to our customers has been very well received and we believe it to be one of the drivers of the business.

Now regarding our acquisition program, we are generally reviewing three to four acquisition opportunities at any time and are hopeful that we will be able to close one or two in the next couple of quarters. In fact, we currently have one acquisition under a letter of intent. The planned launch of our new facility in the Northeast is a direct result of the expansion via acquisition. The new facility is not only designed to improve our infrastructure, but also reduce our operating and processing costs and could generate incremental revenue related to processing of third-party waste. The new facility in the Northeast supplements the acquisition initiative and we view it as an important component to our strategic growth plan.

Third, we need to continue the development of new products and solutions in our pipeline with a goal of helping our very impressive customer base solve problems in a cost-effective manner, while also generating more revenue for the Company. For example, the launch of the MedSafe in late 2014 has been successful, generating incremental revenue of about $1 million since we launched the program. We have almost 500 MedSafes at customer locations and we have processed about 1,650 liners. We believe this program continues to grow as the country becomes more aware of and embraces the proper and safe disposal of unused medication, including controlled substances.

Now we're also optimistic that our new and recently announced TakeAway Recycle System could generate additional revenue with surgery centers, operation facilities, and even hospitals, as the industry is looking for alternatives to the traditional reprocessing of single-use medical devices. What is really nice about this solution is that the industry came to us to develop a program, recognizing our return logistics expertise, as well as our vast experience in healthcare. We are in process of launching a significant marketing initiative targeted for surgery and outpatient facilities, as well as hospitals, and we will be in a better position to gauge the success of the new solution over the next 60 to 90 days.

Finally, we are encouraged by the level of flu business related orders received for the June 2016 quarter. We don't know yet about September and December quarters, but we are hopeful that our retail market billings will recover in the calendar-year 2016.

Now I will turn the call over to Brandon. He will give an update on our sales initiatives. Brandon?

Brandon Beaver

Thank you, David. As David mentioned, although we were short of our internal expectations for the quarter, we did generate growth from the pharmaceutical manufacture, professional, retail, and assisted living sectors. The growth in the pharmaceutical manufacture segment for the March quarter of 36% was due to a patient support program inventory build. We have strong relationships in this market because our partners recognize that we offer not simply a disposal solution for patients in the home setting, but that our unique solution also provides an opportunity for branding and data collection around the patient behavior and medication adherence.

Order patterns can vary from quarter to quarter, due to the program timing, but we are all entrenched in this sector and we are encouraged by the many opportunities we're seeing for pharma, including programs for new self-injectables, new drug indications, and higher patient counts. We currently have 11 total patient support programs, which generated 4.8 million and 6.2 million over the last 9 and 12 months, respectively. We believe we have the opportunity to grow the existing programs by about $1 million or so over the next 12 to 18 months. We expect to launch two new programs over the next nine months, generating an estimated $1 million in customer billings once they are completely rolled out.

The professional market, which increased 28% for the March quarter is made up of small and medium quantity generators such as physicians, dentists, veterinarians, and other small healthcare providers. Our focus here is to educate these customers on the financial and operational benefits and convenience of the Sharps Recovery System, as well as our new route-based pickup service. This sector represents a recurring revenue model, and once we illustrate the cost savings and ease of using our solutions, we increase our opportunity to capture these potential customers. We offer reasonable pricing as well as contract terms and of course our excellent customer service.

Assisted living billings showed continued strength in the second quarter with 23% growth, which is the result of dedicating our resources to closing new customer deals, converting untapped opportunities, and also reflects the appeal of our new route-based pickup service, which is well suited for this market, our sales team is well versed in working with customers to determine how to best meet their operational needs and generate cost savings using either our mail back or the route-based pickup service, and we are refocusing them on leveraging the strength and versatility of our offering to drive more sales.

Our solution portfolio has been strengthened with the addition of our Company owned pickup service offering in Texas and Louisiana and our coverage in Pennsylvania, Maryland, Virginia, Delaware, and Ohio, combined with our network throughout the rest of the country. David mentioned our acquisition initiatives and I want to echo my enthusiasm for this growth opportunity. We are looking at three or four companies at any given time and spend a significant amount of time with them to make sure they meet our criteria, which includes desirable geographic area complementary to our existing route based operations, strong management team and quality drivers, medium and small quantity generators, and a diversified customer base. Acquisitions are quickly integrated into the company and our sales and marketing team immediately begin to target the new coverage areas. Additionally, we introduce new technology to the acquired companies and move all back office functions to corporate. We are anxious to close additional strategic acquisitions and believe this will drive growth for the company. As of today, our sales team consists of five field sales personnel, 16 inside sales personnel, and seven sales, regulatory, and logistical support personnel for a total team of 28 employees. It is an experienced team, focused on being experts in all of our solution offerings, identifying and closing new opportunities, and accelerating our closure rates.

David, I will turn it back to you.

David Tusa

Thanks, Brandon. Diana, why don't you handle the financial section, please?

Diana Diaz

Okay, thank you, David. During the third quarter, revenue grew 8% to $6.7 million, as compared to $6.2 million in the third quarter of last year. Gross margin was 26% in the third quarter of fiscal 2016, compared to gross margin of 27% in the third quarter of fiscal 2015. Selling, general, and administrative expense increased to $2.7 million for the quarter. SG&A for the third quarter of fiscal 2016 includes about $0.1 million of additional costs related to our required audit of internal controls for the fiscal year 2016, which was not required in fiscal year 2015. Exclusive of any potential acquisition related costs, we expect SG&A to be about $2.6 million to $2.7 million for the June 2016 quarter. The company reported an operating loss of $1.1 million in the third quarter, compared to an operating loss of $0.8 million in the third quarter of fiscal 2015. Sharps reported a net loss of $1 million or a loss of $0.07 per basic and diluted share this quarter, compared with a net loss of $0.8 million or a loss of $0.05 per basic and diluted share in the third quarter of fiscal 2015.

Now let's take a look at the highlights for the nine months ended March 31, 2016. Revenue increased 12% to $24.5 million and customer billings increased 14% to $25.1 million. Pharmaceutical manufacturer billings grew 39% to $4.8 million, primarily due to inventory builds for our patient support programs. Professional billings increased 18% to $5.6 million. Home healthcare billings increased 10% to $5.6 million. Assisted living billings increased 18% to $1.6 million and government billings increased 18% in the first nine months to $1.1 million, as compared to $1 million in the first nine months of fiscal 2015. Retail billings declined 3% to $5.5 million as compared to $5.7 million in the first nine months of 2015, primarily due to the mild flu season. Gross margin for the first nine months of fiscal 2016 was 32%, compared to 33% in the prior year. SG&A expense increased to $7.9 million for the first nine months of 2016, an increase of 10% over the prior year period. SG&A for the first nine months of fiscal 2016 includes $0.2 million of acquisition related costs associated with our acquisition of Alpha Bio Med in July 2015 and Bio Team Mobile in December 2015. Without these acquisition related costs, SG&A increased 8% compared to the first nine months of 2015, as a result of ongoing investment in sales and marketing initiatives. The company recorded an operating loss of $0.2 million in the first nine months of fiscal 2016, compared to an operating loss of $0.1 million in the same prior year period. The company recorded EBITDA of $0.4 million in the first nine months of fiscal 2016, as compared to EBITDA of $0.5 million in the first nine months of last year.

Net loss for the first nine months of fiscal 2016 was $0.2 million or a loss of $0.01 per basic and diluted share, compared to a net loss of $0.1 million or a loss of $0.01 per basic and diluted share in the same prior year period. Our balance sheet remained solid with $13.4 million of cash and cash equivalents at March 31, 2016, and no debt. At March 31, 2016, working capital, stockholders' equity, and total assets were $17.5 million, $23.5 million, and $29.1 million, respectively. Inventory at $4.1 million at March 31, 2016, is higher than the balance at June 30, 2015, of $2.7 million. That increase in inventory is a direct reflection of the growth in the business, as well as preparation for government envelope and seasonal flu related orders.

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

David Tusa

Thanks, Diana.

Just a couple of comments before we turn it over to the Q&A. Again, here is what we are doing to get the revenue back on track and take advantage of the many opportunities that we have to further penetrate our markets.

First, refocusing the efforts on inside sales, which impacts the professional and assisted living markets. We grew the markets by 28% and 23%, but again, we think that with more focus we have an opportunity to generate a higher growth rate. Second, we plan to continue the acquisition program. It's working and it really helps the offering with our customers in that we can offer both the route-based service, as well as the mail back. We have one LOI that is currently executed, and again we look at three to four at any given point in time.

Third, we have to continue the development of new products. The MedSafe has been very successful. It has generated over $1 million in revenue. Now we are launching the TakeAway Recycle System. We have to continue to look for additional products and services for the existing and prospective customer base. And finally, we are encouraged with the levels of flu-related orders for the June 2016 quarter. We're optimistic that our retail market billings can recover in the calendar year 2016 as this has always been a significant growth market for us.

And one last thing before we get into the QA, and just to reiterate on the VA TakeAway envelope program, the level of orders we received in the March quarter were very low. We're hopeful for more, but the ramp-up has not yet begun because the internal ordering system for the 125 facilities has just recently been completed and they're in process of communicating the new TakeAway envelope program to our 24 million veterans currently.

So with that, Operator, let's turn it over for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Thank you, our first question is from line Matt Hewitt with Craig-Hallum. Please go ahead with your question.

Matt Hewitt

Thank you for taking the questions. A couple, first regarding the VA, obviously a little disappointing given the slow start and it sounds like it won't have much of an impact here in the fourth quarter, but how should we be thinking about the contribution from that program in 2017? I know that you don't provide guidance, but are you expecting a pickup once this -- the information and the program is fully launched?

David Tusa

Let me just tell you what I know. What I know is what we had said earlier, that it is slow, that they are slow with the ordering process and with the communications, and hopefully when that -- the ordering process has been completed; the communications is hopefully here over the next couple or few weeks. But what we know is that they are the ones that put together the estimated volumes and it is about 2 million envelopes a year. That is their estimate and that is what we know. So, we are going to have to wait and see. We're going to have to see what comes in June and what comes in September and see if the increase in the communications can increase the pull through and increase the volume. So, we really don't know much more than that, Matt. I know that's not the answer you want, but that's really where we are.

Matt Hewitt

That's helpful. I know it's a tough situation to be in, but it is a good reminder that they put the estimates together. A second thing, regarding the gross margin, obviously it is very dependent upon your sales volume. I understand that. It is down a little bit year-over-year. Are there any levers or is there anything that you can do, especially in what is seasonal your weakest quarter, Q3? Are there things that you can do or steps that you can take to minimize the hit to gross margin in this quarter?

David Tusa

Diana, why don't you talk about the gross margin and I will talk about some of the things that we are doing to improve that? Why don't you just hit on what -- on why it was down a bit?

Diana Diaz

Okay, we looked really at gross margin on a year-to-date basis and it does -- there was a decrease from 33% to 32%, and if we look at the details, we see that we do have an increase in our infrastructure costs at the Texas treatment facility and the Texas warehouse. We have started to incur rent on the Pennsylvania treatment facility and some higher insurance costs as well. We also see about a 1% increase in the product costs that we haven't passed on to the customer. So those are the primary things that impacted our gross margin on a current basis. But we do expect some level of savings that we might -- that might offset some of this increase from the Northeast treatment facility. So that's why we're doing it.

David Tusa

Matt, that's what I mentioned earlier. There is many of reasons why we are putting this Northeast treatment facility in place, and one is obviously to add another permitted facility. But we spend roughly, we spend about $1 million with third parties processing our mailbags or processing the regulated medical waste from the owned pickup services. So what we are hopeful for, then, based on some of the work that we have done, is we think that with owning our own facility and treating the waste ourselves and we can cut that cost about in half. So while we have had some increases that Diana mentioned that we think going forward, and we expect that thing to launch in July-August that we have got saving as much as, and we will firm this up, but as much as $0.5 million a year because of we will be processing it ourselves.

Operator

Our next question is coming from the line of Joe Munda with First Analysis. Please go ahead with your question.

Joe Munda

Two questions here. First off, I appreciate the granularity you guys gave on the call. It is definitely helpful thus far. Diana, touching on your comment regarding inventory, the increase there, you had mentioned flu and government envelopes. Any chance you could give us some sense of the mix in regards to the two?

Diana Diaz

It is just the slight increase was due to the flu and the envelope amounts that we have in inventory, and the flu will be seasonal. It will all go out in the June quarter. So I think it is pretty typical of a seasonal change in the balance sheet.

Joe Munda

No, no, what I'm asking for is, is the increase half of it due to the envelopes, 60% due to the envelopes? Any idea of percentagewise what's going?

Diana Diaz

About half.

Joe Munda

Okay, that's helpful. David, on, yes, I'm sorry. Go ahead. On the MedSafe, you had touched on it. You had talked about a $1 million contribution thus far. I want to get your take. Walgreens is rolling out their own solution, 500 locations, really putting out a marketing effort there, disposal of unused medication. Are you based on your relationships in the retail pharmacies, could we expect possibly sometime down the line one of your customers to introduce a similar offering and do you think you would be the supplier of choice there?

David Tusa

Well, first of all, when you step back and you look at MedSafe, when you look at the new offering, with the exception of Walgreens the retail sector has been a bit slow, a bit slow to adopt it. We have probably done much better with government, with long-term care, law enforcement, some of the other markets that the new laws were designed behind. But absolutely that we will present to retail and we have presented the offering to retail. And we think that although it has been kind of slow on that side that ultimately you will see more and more retailers moving this solution into their stores.

Joe Munda

Okay. Moving on to the new product, the TakeAway Recycle System, you talked about industry approaching you to come out with a solution. Now, is this coming from manufacturers or are these coming from customers demanding a product? Just a little clarity there would be great.

David Tusa

Sure, that's a really good question. What happened were that the customers of the device manufacturer that we are working with basically went to the device manufacturer, so the ultimate customers, which is the hospitals, surgery centers, outpatient centers. They wanted an alternative solution for the proper disposal and treatment of single-use devices. They wanted an alternative to the traditional reprocessing. So the customers went to the manufacturer, the single-use medical device manufacturer. The single-use medical device manufacturer came to us, and we worked together with them cooperatively to develop a solution based upon customer input, clinical input, and other input, and that what we're doing now is we're working with a major device manufacturer and we are co-marketing the solution to all of their customers. So we're excited because it is the industry looking for a solution and we're pretty good at reverse logistics. We know the healthcare market and we think that we've got a real opportunity here to launch a new product that solves a need in the customer base and, at the same time, generates more revenue for us.

Joe Munda

Okay. That's helpful. On the acquisition front, you talked about one having an LOI right now one under an LOI, I'm sorry. Are we expecting something of similar size as far as acquisition, the price tag on it, on a possible acquisition? Is it going to be similar to the size of the last two or is it going to be somewhere bigger as far as -- go ahead, I'm sorry.

David Tusa

I don't want to get into too much detail for competitive and other reasons, but I will just tell you that the deals that we look at, they are traditionally what brand and they are a hauler at maybe $1 million in revenue or maybe they are actually have a hauler as well as treatment. You do find those where they have both a treatment facility as well as a hauling what are those 2 million or 3 million in revenue?

Brandon Beaver

Usually up to 3 million.

David Tusa

Yes, so…

Brandon Beaver

Usually up to $3 million.

David Tusa

Yes, so that's what we look at, and when we have three or four that we are looking at, we probably have a couple of each. So, let us work through this LOI on this one. We're excited about it. We think it would be a really good fit and I would rather save the color on it until we get it closed.

Joe Munda

Okay, okay. Fair enough. And then, just two more real quick. Due to the weaker than expected flu season, are you seeing any cut to flu budgets from some of your customers as far as the season goes? Assuming, A, possibly that next season could be weaker, so they are not they are bringing down their budgets as far as purchases are concerned?

David Tusa

No, no, we are not seeing that. And let me tell you how it works with the flu business. The June orders are pretty solid because what they're doing is they are filling the system and you are getting the initial orders, so the real test of the flu season will be the September and the December orders. But again, we are encouraged by what we are seeing in June, but really it is going to be that September and December quarter where we are going to really be able to tell if it is going to be a good season.

Joe Munda

Okay. And then, I guess my final question on the VA. The ramp has been slower. You talked about the ordering system just being in place now. But can you give us a sense of the communication efforts that are going out to these vets? You touched on it, but can you give us a sense of what that entails?

David Tusa

Sure, it entails many things. What it entails is communication at the facility level to the veterans. It entails adding information and flyers and notices to the veterans at the places where they order and receive their drugs. And it's also generally added to a number of places throughout the VA website. So, we really haven't seen all that pushed through yet and we are hopeful that once this is fully communicated that that will create the pull through. That was the original plan and I think that was the plan that was used internally by the VA to come up with this estimated 2 million envelopes the year. But we don't have it yet. What we know, and we will see over the next couple of quarters in what comes through.

Joe Munda

And that marketing is going to be paid on the VA's part or are you contributing money to.

David Tusa

No, the VA. It will be the VA, throughout the VA system and their websites and their initiatives, and again, when the veterans order their drugs, they will communicate to them the availability of a free TakeAway envelope.

Joe Munda

Okay, okay. Thank you. I will hop back in the queue.

Operator

Our next question is from the line of Kevin Steinke with Barrington Research. Please go ahead with your question.

Kevin Steinke

David, you obviously discussed quite a bit your acquisition program and pursuing route based businesses. Are you trying to signal here an increased focus on the acquisition program or is this just business as usual as you see it?

David Tusa

No, no, it's an increase. It is definitely an increased focus, and once we can combine that mail back with the pickup offering, the customer base reacted very positively to that. Additionally, it adds infrastructure. What else we like about the route based business, it adds recurring revenue. Stable recurring revenue will help smooth out hopefully some of these bumps that we have in some of our markets. But we have started in the Northeast. We have the south and we continue to look at other areas, but I got to tell you, Kevin, we are not acquiring to acquire just to acquire. We're pretty strict about the parameters by which we will look at an acquisition candidate, as Brandon mentioned. Good management, they have got to have a solid customer base, and I will just tell you right now. If they are $1 million to $3 million in revenue, the first thing that we look at is, okay, is it a 40% plus gross margin? Is it a 20% plus EBITDA margin? And that is a sign of a good base of customer business, small to medium quantity. It is also a good sign of a well-run company. So that is the parameters we use and we will continue to look. And we're going to be opportunistic and we will add as we think it is appropriate.

Kevin Steinke

Okay, that's helpful. And following up on those acquisition parameters that Brandon talked about, I think one of the things listed was that it is complementary to your existing route based system. So does that imply that you are mostly looking at acquisitions in the Northeast and South where you already have existing route operations or are you perhaps looking at other geographic areas for acquisitions as well?

David Tusa

We look at the geographic areas that make sense. And, yes, it does make sense if it can be we can combine it with existing operations and generate some synergies. The other thing you look at is, is it complementary from a margin standpoint? Does it make sense? Is it an area that we believe will be well serviced by the pickup? There are some areas in the country that we will probably stay away from. Brandon, what do you think?

Brandon Beaver

Yes, I think David just mentioned complementary. Looking at the synergies where we can utilize existing route operations right now, we become more efficient. But we also have to be opportunistic, Kevin. If something comes along and it is in a different geographical area, we're absolutely looking at it.

Kevin Steinke

Okay. That's helpful. And I think Brandon, another thing you talked about, I believe was -- or maybe it was David but anyway, focusing on customer prospects that have shorter sales cycles and also deals that are more likely to close. So does that imply a certain type of customer that those parameters would apply to or how do you prioritize the sales pipeline to pursue those with shorter sales cycles and that are more likely to close?

Brandon Beaver

It's a great question, Kevin. We are really focused on looking at now the middle-market accounts, so we still look at it from a national scope, but really trying to bring down some of these targets that might shorten our cycle from some of the larger deals that are out there to some of the more mid-tier prospects that we think that hey, have a little bit quicker closure rate when they do due diligence looking at providers such as ourselves. So we have found that we have had some success in that over the last couple of quarters, and so now we're building upon that, looking at our pipeline database and trying to identify hey, if we had some success in this mid-tier, how can we continue to build on that?

Kevin Steinke

Okay, great. And on the TakeAway Recycle System, can you just describe how that works from a business model perspective? Is it pickup or mail back or a combination of both, based on the customers' needs? And then also have you analyzed that product in terms of incremental revenues that it could generate perhaps per device or per customer or however you might have looked at it?

David Tusa

Sure, we -- Kevin, what it is, and then you can -- there is pictures of it. I think we have it on the landing page as well on our website, but what it is a collection system. It will include either two or three plastic collection containers that are used to collect the single use devices after they are used, obviously. And it's returned to us via common carrier. The markets wanted a common carrier approach and that's what it is. It is a common carrier.

So it will come back into our treatment facility, and what we will do is we will break it down by the individual components. It is typically plastics, metal, maybe some batteries. The plastics will go into our normal medical waste treatment process. There is some stainless steel. The stainless steel will be sent to a stainless steel recycler. The batteries maybe to a battery recycler. So it is really recycling it back to its basic components. And that's what the market is looking for. We are not recycling it and turning it into new devices. We are recycling it back to its basic components.

From a revenue standpoint, we will see. I just know that there is hundreds of millions of these single use devices that are sold in the United States and there appears to be a demand from the marketplace. So, what I would really like to do is let's see how it goes over the next 60 to 90 days and let's look at the traction and look at the customer reaction and we will probably be in a much better position to be able to talk about revenue.

Operator

Our next question is from the line Brian Butler, Stifel. Please go ahead with your question.

Brian Butler

Thanks for taking my questions. Just first on when you think about that critical mass to even out or at least marginalize the impact of some of the swings in things like retail flu, what level do you think you need to get to smooth that out? You are at, on an LTM basis, around 33 million. Do you need to be at 35 million? Is it 40 million? What is the right number that you think smoothes this from a quarterly basis?

David Tusa

That's a really good question. The way we look at it is yes, we're 33 million trailing 12, and at that level we are still subject to some of the volatility in some of the markets. I think it needs probably to be from a critical mass standpoint -- to begin to say that we have critical mass, I think you are looking probably at 40 million or 50 million and you will have enough incremental revenue that can absorb a $2 million hit here in the flu business. So, I have said many times we are not here to run a $30 million company. We are here to take advantage of the market opportunity and grow a much larger company.

Brian Butler

Okay great. And then when you think about getting to that number, especially when you talk about the acquisitions and more of a focus on those four -- three to four deals in the pipeline, what do you think is a reasonable number, or at least a target maybe internally, that you guys can close on an annual basis? Is this something where you could actually be adding $4 million to $6 million in revenues annually or is that too high of a target for the acquisition program you have in place?

David Tusa

Well, first of all, back up just a second. We've changed -- the Company has changed a lot over the last couple of years. Let's start there. And we have new solution offerings. We have the MedSafe offering. We have some additional offerings. The pharma business, Brandon has done a great job of bringing in more and more of that pharma business, which helps build the critical mass. And, yes, we are looking at this, the TakeAway Recycle System, which is new, and, yes, we are looking at the acquisition. So I don't really look at it from the standpoint of acquisitions. Acquisitions are great, and we're going to be opportunistic and we're going to land the ones that make sense for both us and the seller. But I really look at it differently. I look at how much incremental revenue can we generate from MedSafe, from the TakeAway Recycle System, from our haz waste services, to additional pharma deals, to government opportunities, as well as the acquisitions. So, we need more revenue. So, we will take it from as many of those that we think that we can reasonably generate.

Brian Butler

Okay, and then maybe another way to ask on the acquisition side is just what limits your acquisitions? Is it really just doing the due diligence and matching up the right assets? I guess clearly there is capital in place or you have capital to deploy; it is just, it seems like these have come out, I am just trying to understand what your targets are of doing this. Is it just whenever it seems right you're going to put these in place or is there really an effort of we can add X dollars a year?

David Tusa

No, what we do is we, what we do is we look at it from an opportunistic standpoint. What we do is we identify all of the targets and then we spend time with them, and again, they need to be in a desirable geographic area. They need to be complementary to our existing business. They have got to have strong management. We are not going in to acquire these companies to let all the people go. We need these folks, these employees, to help us grow the company. The base, the customer base, needs to be a small or medium quantity generator. We don't need one that has 80% low-margin LQ business. We are looking at small and medium quantity business and we look at it from a diversified customer standpoint. So, it's got to meet all of those parameters. The margins have got to make sense and then we will look seriously at trying to buy them.

So, we're selective; we are not going to do this just to do this. We're going to do it on an opportunistic basis. It's taking a little bit longer than I would've expected. I would have hoped that we would have had more done. But because of the parameters that we have established, it limits them somewhat. But I got to tell you we did a heck of a job of integration. We have got an integration plan. We plan these things well in advance, and when we take these companies on, they are integrated very quickly into our system. We introduce new technology. We take over the back-office functions and the sales and marketing group starts targeting their areas.

So we have been pleased. As an example, I think the two acquisitions were $800,000 or $900,000 in revenue something like that on the ones that we have acquired, and the run rate right now is over 1.2 million based upon the March revenues. So it works. So we could turn our marketing machine on, add technology, and get in there. With our inside sales team, we can grow the businesses. So revenue growth is really important post acquisition. That is why we're selective in the ones that we acquire.

Brian Butler

Okay, great. Good color. On the, I guess then looking at the Northeast treatment facility, you talked about 0.5 million in savings. What is the total capital cost expected on that facility?

David Tusa

Well, first of all, it is two in one. It is not just a treatment facility. It is both a treatment facility and a distribution warehouse. We have a significant portion of our customer base on the mailbox side that's up in the Northeast, Midwest. So, we're going to spend probably collectively between both of the components, probably about 1.5 million for both of them. We will realize savings through the use of a distribution center. We will have reduced transportation costs, drop-down transportation costs to our customers because we are shipping from the Northeast. And then on the treatment side again a rough estimate, we know we spend about 1 million and we think we can probably cut that in half and hopefully generate about $0.5 million in savings. But the footprint is really important as well because think about this new TakeAway Recycle System. If it works, guess what? Guess where all of those systems will be returned via common carrier that may come from the Midwest, Northeast? It will go to the PA facility. It will reduce the return transportation costs and take advantage of an additional facility.

Brian Butler

Okay, just to clear you there, you said so you're going to get 0.5 million in savings, potentially, on the processing, but there is also some savings on transportation as well. Is that equal to that 0.5 million or is it much less?

David Tusa

It will probably be less than that. We are working through that right now. We're going to stage that distribution facility in what we're going to start to move out of there, but with some of the numbers we have looked at it looks like it is going to be a reasonable amount of savings, probably not the $0.5 million level, but even if it is half that, it is still significant.

Brian Butler

Okay and then switching over to the VA program, on the 2 million envelopes per year, if they were to reach that number, what does that translate into revenues?

David Tusa

What is the BPA? What is it, 7 or 6.7? What is it?

Diana Diaz

Yes, $7 million.

David Tusa

$7 million a year.

Brian Butler

That would be the full $7 million, okay.

David Tusa

Yes, it is a five-year deal. It's one year, plus four option years, $7 million a year.

Brian Butler

Okay, and then on the orders that you have seen to date on the flu related business, what pace is that when you look back at first quarter or I guess it is your third quarter 2015 where you had an extremely strong quarter? I think you did $3 million in revenues in retail for the fourth quarter. So.

David Tusa

Yes, the best way to look at it is look at the fourth quarter of last year. What did we do, Diana?

Diana Diaz

We did about $3 million of revenue in the retail market and about $2.3 million of that was flu related business.

Brian Butler

And what you saw in April, are you on that pace right now or ahead or behind it?

David Tusa

Just what we had said earlier, that we are encouraged with the level of the orders that we have received and that we are hopeful that we can get that market back on track.

Operator

Our next question is from the line of Shawn Boyd with Next Mark Capital. Please go ahead with your question.

Shawn Boyd

Just to follow that last question for a second, I am just putting this together as we were talking earlier about $2 million in lost orders on flu. If you put that in with the first three quarters of the year now, on retail, we would have been on track for about 30% growth. That's what you guys used to do before this season, which has obviously been a tough season.

David Tusa

No, the way we come up with that $2 million is if you take flu business last season. I am sorry, the season it would have been the 2014 season, and you increase that by about 15% and we were $2 million short of that. But historically, the flu business or the retail market has been up 20% what, 24% to 30.

Diana Diaz

20 to 30% plus.

David Tusa

30% plus. So we were just looking for just a 15% increase. So, it is so weak that we not only didn't we didn't reach that 15%, but when you compare an increase of 15% to the actual orders we received for the 2015 flu shot season, it's down about $2 million. Did I say that right?

Diana Diaz

Yes.

Shawn Boyd

I got it. I got it. But that is the perfect segue, then, David. This business used to be a 25% to 35% grower.

David Tusa

Right.

Shawn Boyd

Is there anything in those orders that is changing? The June quarter orders that you are seeing for those initial stocking for next year, are we going back to that kind of rate or are we at a lower growth rate now that we should think about retail?

David Tusa

Well, we can say right now and again, the only thing we know of is June. You won't know September and December until we receive September and December. But the preload orders for June and what did we do last year, 2.3?

Diana Diaz

Yes.

David Tusa

2.3 last year, then we are encouraged with the level that we have already received right now, so we feel pretty good about the June quarter, based upon what we have seen so far.

Shawn Boyd

Got it. Okay. David, switching gears to the government business, the ordering system, that is up and running now?

David Tusa

Yes.

Shawn Boyd

Okay. And so, it is really a matter of the marketing and the awareness and just getting the communications going. Is that what I should understand?

David Tusa

Exactly.

Shawn Boyd

All right. And so, this business originally was cranking along $700,000 a quarter actually for two, three quarters. Then the blanket purchase agreement kicked in. And we have got this pause, and if I understand it, we should be going back to this $7 million a year revenue, the $2 million excuse me, 2 million envelopes per year level. That is what they stipulated as the maximum of the contract. So, can you just help us understand is this a one quarter ramp, a two quarter ramp? And I know we are all shooting in the dark here, but just given that it's been a little slow, anything you can help us in terms of their what they have come back to you with on getting this communication out and getting the awareness up?

David Tusa

So, well, first of all, it is $0.5 million a quarter. What was it the.

Diana Diaz

In the March and the June quarters.

David Tusa

March and June. In March and June 2015, it was $0.5 million a quarter.

Diana Diaz

Of envelopes.

David Tusa

Of envelopes. The 750 was government. That probably included some MedSafe and some other things. So that $0.5 million the two $0.5 million orders were orders that we received before the BPA to be able to get some envelopes into the system. Now the BPA comes along. Now it is different now. Now you get the BPA. It is November of.

Diana Diaz

End of November.

David Tusa

Right, it was end of November, so now you're starting and you're working with a different system. So you are starting over. So now with that, you have to have the ordering program in place, which they do now, and then you have to have the communications. So, you can't really look at that $0.5 million a year. I am sorry, the $0.25 million that we received in the March and the June quarters as being related to the BPA. But as far as predicting, I am not going to predict. I am just not going to. I just know that they are the ones that came up with the 2 million envelopes a year and that was their estimate, and hopefully over the next couple of quarters, we will start to see the ramp up. But I am just really not in a position to say anything more than that.

Shawn Boyd

Got it, okay. Last thing from me. Diana, and I apologize if I missed this when you were talking gross margin, but obviously the scale being down is the biggest driver here. Was there anything in the things that you went through earlier, anything that has permanently changed such that we wouldn't get that gross margin back as we get revenues scaling back to the old levels?

Diana Diaz

I think the costs that I talked about that we see this year are costs that will stay. They will be there, but there are some savings that are coming that we expect in the Northeast treatment facility that will offset some of that increase, hopefully most of that increase. But that is -- those costs are recurring.

Shawn Boyd

Got it, and that facility is coming up in July, August, David?

David Tusa

That's correct.

Operator

Our next question is from line of Joe Munda of First Analysis. Please go ahead with your questions.

Joe Munda

David, real quick a follow-up on the pickup service. Can you give us a sense of, I guess, the size of the fleet, the truck fleet and some of the stipulations you guys use to figure out when is a good time to add another truck? Some of that would be great. Some color there would be great, and have you increased the fleet at all since the acquisition?

Brandon Beaver

Very good question at the end there, Joe. I believe right now with the two acquisitions and the start-up with Texas and Louisiana we have eight trucks out there currently, but let me speak to the second part to that. There was a question earlier, I believe by Brian, talking about the acquisition initiative, obviously that is a very important initiative for us. But I will tell you organically we are growing and we have added routes over the last 6months to 8 months already just based on sales closing, so we have added routes in the Texas region. We have added routes up in the Northeast region, which then leads to additional trucks. And so, where do we add trucks? That's always dependent upon not just revenue, but from a geographical standpoint, where do we want to go into? Do we want to take it for a while and add a truck and try to grow that route? Do we want to say, hey, you know what, we are maximizing, we are at optimization with each one of our trucks, is it time to do it now?

So, there is some -- there is no magic sock to it, but there is a couple of different scenarios where we look to add additional trucks to the fleet.

Operator

Thank you. At this time, I would like to turn the floor back to management for closing remarks.

David Tusa

Great, thank you. Again, thank you everyone, for joining our call. We appreciate all of the questions and we look forward to speaking with you next quarter.

Operator

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

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