Sharps Compliance Corp.

Good day, ladies and gentlemen, and welcome to the SHARPS Compliance Third Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jen Belladeau of IMS Investor Relations. Ma'am, the floor is yours. Thank you.

Good morning, and welcome to the Sharks Compliance Third Quarter Fiscal 2022 Earnings Call. On the call today, we have Pat Malloy, the company's President and Chief Executive Officer, Eric Bauer, Executive Vice President and Chief Financial Officer, and Diana Diaz, Chief Accounting Officer. Pat will review the company's business performance, operations, and outlook, while Eric will review the financials. Immediately following their formal remarks, we will take questions from our call participants. As you're aware, we may make some forward-looking statements during the formal presentation and in the question-and-answer portion of this teleconference. These statements apply to future events which are subject to risks and uncertainties, as well as other factors that could cause us 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's Securities and Exchange Commission. These can be found at the SHARPS website or at sec.gov. With that out of the way, let me turn the call over to Pat to begin the review and discussion. Go ahead, Pat.

Yes. Thank you, Jim, and it's good to be with all of you this morning. Good morning. Thank you for participating in our third quarter fiscal 2022 earnings call. As most of you know, this is my first earnings call since my appointment as the SHARPS CEO in early April. In fact, this is my fifth week on the job. I've had the pleasure of speaking with many of you during this transition in leadership, and I appreciate your time and your guidance, and I'm glad to be with you today. While it is still relatively early in my tenure as the CEO here at Sharps, I have served as the director of this company since February of 2021, and over the course of the last 25 years, I've run three different senior housing operating companies. I have to tell you that as much as I was drawn to the mission of senior care and senior housing, I love the mission that has ours here at Sharps. Our mission of providing safe, secure, compliant, and environmentally sound healthcare workspaces is vital. This pandemic has taught us all a host of lessons, but one of the most critical is that safe, healthy, compliant workspaces for the healthcare providers across this country is paramount. Our mission, helping healthcare providers dispose of their waste material in mail-back solutions, by route-based pickup solutions, and creating innovative solutions for the proper disposal of unused medications is more relevant than it ever has been. We provide a critical service to healthcare providers in this country. I fully recognize after five weeks in my seat that I stand on the shoulders of lots of individuals who have worked hard over 20 plus years to build the business that is SHARPS today. In my fifth week here from the office in which I now sit, I can tell you that we are a nimble, smart, customer service oriented team. We built three great core product offerings. Our founding product of innovative mail-back solutions, our innovative unused medication and controlled substances disposition system, the MedSafe product, and an ever-expanding route-based network that serves over 80 plus percent of the US healthcare provider population network in this country. From the start of my time as a SHARPS board member, I have believed that our company has a tremendous opportunity to truly scale this business with the potential to become much larger than we are today. Thoughtful, focused growth is my primary focus. Since my appointment as CEO, I've spent a lot of time, a great deal of time with our associates across our businesses. In the next several weeks, I will tour our New York-based facilities, our Nesquihoning facilities in Pennsylvania, our Carthage, Texas facilities. We have the people products and infrastructure to aggressively expand our geographic reach and to capture market share, both organically and through acquisition. That was our strategy before I became CEO and will continue to be our strategy. I'm energized by what I've seen so far, and I'm excited to be leading this company at what I believe is a pivotal time in its development. Now to the quarter. Our third quarter results are largely in line with our expectations. and they reflect a return to more normalized market conditions following an unusually strong performance in the March quarter of fiscal 2021, which, as you know, benefited significantly from COVID-19 immunization activity. March has historically been our slowest revenue quarter due to seasonality and customer ordering patterns, so we believe that looking at March 2020, a pre-COVID period, provides a helpful, more normalized comparison. With that being said, third quarter 2022 revenue of $17.6 million shows a significant 69% increase as compared to the third quarter fiscal 2020 pre-COVID revenue of $10.4 million. Our gross margin of 28% was lower than anticipated, primarily due to higher costs related to hiring additional operating personnel to meet increased demand, which required increased wages to match market conditions. Our success relies on our ability to drive customer service, to have the right people in place to ensure that we can provide uninterrupted service to our customer base. So while the expense causes some short-term margin pressure, we believe that the long-term benefits far outweigh the cost. Also, like the rest of the entire country, we're feeling the impact of higher fuel costs, particularly as we want to run our route-based business. In a few minutes, Eric will give you a little bit more color and context on that. To cover the increased operating costs of our solutions and services during the quarter, we implemented a number of customer price increases. However, these increases were not yet fully reflected in revenue during the third quarter of fiscal 2022. We expect that the full impact of our cost mitigation initiatives will alleviate potential continued cost increases going forward. Our route-based business continued to perform well in the quarter, with a 21% increase in route-based customer locations to bring us to 18,600 locations compared to 15,400 in the third quarter of last year. That drive in customer locations has resulted in an increased 12% increase quarter-over-quarter in route-based billings. Related to our route-based growth, professional market billings grew 19% compared to the prior year of third quarter. again consistent with the increase in route-based customer locations. During the quarter, we closed our acquisition of Midwest Medical Waste, a full-service route-based provider of medical waste solutions that serves over 600 customer locations across Kansas, and we have fully integrated those operations. We remain intently focused on growing our route-based footprint, both organically and via strategic acquisition, and our acquisition pipeline is uninterrupted, it's robust, and it's very active. Looking at unused medication, billings grew 1% for the quarter. Within this category, MedSafe billings increased 19% to $1.5 million. That was driven by a 20% increase in the number of MedSafe liners sold and a 19% increase in liners returned. These results illustrate the success of the recurring revenue model generated from the MedSafe offerings. We're focused on the continued rollout of MedSafe to retail pharmacies, as well as the long-term care market. And as we previously discussed, during the quarter we announced a partnership with PharmAmerica, a nationwide leader in long-term care pharmacy services, in a relationship that I helped bring to the table as a board member. I look forward to working with them and other long-term care pharmacies to solve a complex problem. It's a bit of an overlooked problem in the post-acute skilled nursing assisted living world, that regulators are increasingly demanding more and more compliance. And MedSafe, frankly, is the cleanest, simplest solution to help solve this problem in the post-acute space, and we're in the early innings of our growth in that area. With my experience in senior housing and in long-term care, I can't emphasize enough what a challenge the industry faces when it comes to the proper cost effect and compliance management of unused medications, which oftentimes includes controlled substances and hazardous waste. Medication management in this space has always been a priority, but the focus now on compliant disposal solutions, that focus positions us uniquely in the market. Additionally, every senior housing provider as they're trying to rebound post-COVID, whether it's skilled nursing or whether it's assisted living or independent living or dementia care communities, they're reexamining every way they're doing business to try to find better and more cost-effective solutions. and we believe that MedSafe is the ideal solution for this particular issue. As you know, MedSafe was developed in response to DEA proper disposal regulations that were established in 2015. Our receptacle is critical in attacking the controlled substance diversion issue, which is real both for consumers and people out in the marketplace, and it's real for long-term care providers. We believe the runway in front of us as it relates to MedSafe is tremendous. Of our nearly 7,000 receptacles currently in place, I think this is an interesting point, of the nearly 7,000 receptacles we have in place across the country, only 900 are in the long-term care space. There are 16,000 skilled nursing communities and nearly 30,000, about 29,000 assisted living communities across this country. We're rolling up our sleeves, and we intend to meet the demand in this space and penetrate these markets. With its proven success in the retail pharmacy and government markets, we believe there's tremendous opportunity to move aggressively, roll out the MedSafe to the long-term care and assisted living markets. We look forward to leveraging our PharmAmerica partnership and working with other long-term care pharmacies to increase adoption of this particular product to these facilities. Last, before I turn it over to Eric. As you saw last evening, we filed an 8K concerning the restatement of our consolidated financial statements for the first and second quarters of fiscal 2022 related to underreported freight costs associated with a misunderstanding with our largest carrier regarding services rendered during those quarters. The costs for services during the first and second quarters were invoiced at a later date because of a billing error by our largest carrier and related to a change in their software billing program that impacted one of our facilities. The majority of these invoices were received between three and six months late, all during the third quarter of the fiscal year, and many of the charges had no dates of service attached. We formally disputed these charges with the carrier and successfully negotiated a refund of nearly $300,000 because of their error. We were willing to take the entire charge in the third quarter. But after discussions with the auditors, we agreed to allocate the charges retroactively to the first and second quarters of fiscal year 2022. Let me be clear. This restatement is about reallocation of cost to the two prior quarters. It has no impact, no effect on the full fiscal 2022 financials and does not affect fiscal year 2021. Importantly, revenue, cash flows from operating activities, and net changes in cash and cash equivalents are not affected by these adjustments. The issue is resolved, it is settled, and our relationship with this carrier was and continues to remain excellent. The details can be found in the 8K. As we move through the balance of fiscal 2022, we are intent on growing Sharp's leadership position as a comprehensive provider of cost-efficient, compliant solutions for the disposal of hazardous and medical waste. We're also focused on continuing to expand our leadership role in helping to prevent the continued circulation of unused medications that often lead to accidental overdose by use of our MedSafe and takeaway envelope solutions, which I've discussed. This is an exciting time for Sharks, with significant opportunity for us to grow our footprint and expand our solutions across all of the markets we serve. We see great potential for the organic growth of our route-based business, as well as many promising acquisition opportunities fueled by a robust acquisition pipeline. And despite the short time that I've been on the CEO seat, I'm more than confident that we have the right people, solutions, and infrastructure to take this company to the next level. Thank you for your time. I'll turn it now over to my colleague, Eric Bauer, our new CFO, to address the financials in more detail. Thank you.