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.

Thank you, Pat. We reported revenue for the quarter of $17.6 million, a decrease of $10 million or 36%. As Pat mentioned earlier, excluding COVID-19-related immunization activities, Third quarter 2022 revenue increased 24% as compared to third quarter 2021. Customer billings were $17.1 million in the third quarter of fiscal 2022, a decrease of $13.9 million, or 45%. Immunization-related mailback billings were $2.9 million in the third quarter of fiscal 2022, compared to $20.2 million in the prior year period. Excluding COVID-19-related immunization mailbacks, customer billings increased 41%. Professional market billings increased 19% to $5.5 million in the third quarter of fiscal 2022, as compared to $4.6 million in the third quarter of 2021, consistent with the increase in route-based customer locations. On that note, this is the first quarter we have realized over $4 million in revenue in the route-based business, driven primarily by the increase in the professional market billings. Retail market fillings decreased 79% to 4.6 million in the third quarter of fiscal 2022 as compared to 21.7 million in the same prior year period, reflecting returns of more normalized activity following the surge in immunization activity that occurred in March 2021 quarter related to demand for the COVID-19 vaccine. Within the retail market, Immunization-related orders were $2.9 million in the third quarter of fiscal 2022 compared to $20.2 million in the same prior year period. Compared to the pre-COVID third quarter of fiscal 2020, retail market billings for immunizations increased $2.2 million in the current quarter from $600,000 in the third quarter of fiscal 2020, an increase of over 350%. Year-to-date billings are $9.3 million. Pharmaceutical manufacturer market billings increased by $1.9 million to $2.5 million in the third quarter of fiscal 2022 as compared to $0.6 million in the same prior year period related to timing of inventory bills for patient support programs. Long-term care billings decreased 10% or to $0.9 million in the third quarter of fiscal 2022 compared to $1 million in the prior year period related primarily to heightened volumes of COVID-19-related waste management in the prior year. most of which impacted route-based customer billings. Billings for unused medications in the third quarter of fiscal 2022 stayed consistent with the same prior year period at $2.1 million. Within the unused medication category, MedSafe billings increased 19% to $1.5 million from $1.2 million in the prior year period, consistent with a 20% increase in MedSafe liner shifts and a 19% increase in MedSafe liners return for processing. The increase in MedSafe buildings is mostly offset by a decrease in takeaway envelope sales due to higher than normal sales in the prior year quarter. We installed 109 MedSafe during the third quarter compared to 141 in the same quarter prior year. On a year-to-date basis, we've installed 613 units, down 12% from the comparable three-quarter period for fiscal year 2021. Although we believe there's opportunity remaining in the retail space on the other side of COVID, We believe that there's significant growth opportunity in the farm America and other long term care pharmacy relationships and customer base and long term care market in general. We believe calendar year 2022 Medsafe installs will be driven more by long term care than retail pharmacy. And as Pat noted, of our nearly 7000 installed Medsafe today, only 900 are in long term care community. There are over 45,000 skilled and assisted living communities in the country. Related to utilization of existing installed MedSafe, MedSafe liners returned in process in the third quarter of 2022 with 9,189, up 19% compared to 7,710 in the prior year quarter up. This primarily indicates more traffic in retail pharmacies. Liner shift of 9,843 is up 20% year over year. Total liners returned since program inception are over 113,000. Total med state units installed were 6,736 at March 31st, 2022. We reached an exciting milestone this quarter, having processed over 5 million pounds of medications in med state liners since the inception of the program. Gross margin for the third quarter decreased to 28% compared to gross margin of 49% in the third quarter of fiscal 2021. SG&A increased by about 0.5 million, or 13%, $4.7 million in the third quarter of fiscal 2022 compared to the same prior year quarter. The increase in SG&A is related primarily to $0.2 million in acquisition costs, $0.1 million in management transition costs, and continued investment in sales and marketing. We reported near break-even operating income in the third quarter of 2022 compared to operating income of $9 million in the third quarter of 2021. Chuck recorded a net loss of $0.3 million or a loss of $0.01 per basic and diluted share this quarter compared to net income of $6.9 million or $0.41 per basic and $0.40 per diluted share in the third quarter of 2021. The company reported EBITDA of $0.7 million in the third quarter of 2022 compared to EBITDA of $9.6 million in the third quarter of last year. Our balance sheet remains very strong with $26.7 million of cash as of March 31, 2022. compared to $36 million of cash as of December 31, 2021, $41.2 million at September 30, 2021, and $27.8 million at June 30, 2021. The company had working capital of $37.1 million at March 31, 2022, as compared to $27.9 million at June 30, 2021. Our strong balance sheet provides us with the opportunity to execute on our broader acquisition strategies to continue to work our active pipeline of opportunities. With that, I'll turn the call back to Pat.

Great. Thanks, Eric. Operator, let's open it up with a Q&A session. And at the end of that, I've just got a few quick closing remarks, please.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. While posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Jerry Sweeney. Please announce your affiliation, then pose your question.

Good morning. It's Jerry Sweeney from Roth Capital. Thank you. Hi, Jerry. Question on the gross margins, and I'm not sure if you necessarily have the detail, but do want to pose it at least. Is there a way you can bucket out how much of the impact of gross margins was due to new hiring and maybe some increased salaries, et cetera, just because of the inflationary environment? And then the follow-up would be to that, how do these price increases work? How long does it take to go through the system? And are all customers or contracts eligible? Because I know you have a whole host of customers. And how do we look at that sort of working its way through the system?

Why don't I speak at a high level first about the pricing, and then I'll turn it over to you because we were all talking about this this morning. Jerry, that will give you some context on the key drivers on cost. One of the first questions I asked when I came on board five weeks ago was to start to begin to understand about pricing. And the good news here is that Diana and the team here, and Diana has been a critical leader in the pricing of our products together with all of our operating leaders, they started a review last November when they started to see inflationary trends, particularly in fuel costs and labor costs, for a lot of reasons that everybody's aware of. And they did a comprehensive examination starting in November of last year of every price of every product that we have. As you all know, one of the reputational issues for Sharps is that we are a customer-friendly organization in that our contracts are fairly straightforward. They're fairly direct. And so there are some contractual limitations to what we can do. But where we can drive costs and drive price increases, we did that in an appropriate way beginning in last November across every product line. And there's some one-off situations I'm not going to get in and discuss actual products and percentages of increases, but that comprehensive, I mean, it's a normal part of our business, but the comprehensive look starting in last November really resulted in a series of price increases that began in earnest in this third quarter. They're not fully implemented, yet you will see more robust revenue increase because of those price increases more fully implemented in the fourth quarter. Let me ask Eric if you want to speak and give context to the cost drivers, I think that would be helpful in terms of labor, fuel, all that.

Yeah, and on the margin, a part of that also is just a lot of the mail-back activity we had last year. We're seeing a lot of the expense falling through that.

Correct. So as we said before, the margin when we sell, the immunization mailbox is a bit higher than it is when they come back. And so there is some swing in the margin during those different quarters.

But also on the cost piece of it, and we've been looking at every single facet of our business from diesel costs, to aluminum costs for RV poles, to corrugate, to labor. We've seen, particularly on the driver's side and on the labor side, we've seen a lot of the increases also on the fuel side that other folks have seen. When we look at it from a cost perspective, A, a lot of that as we mentioned in the past comment was related to really just needing to fill seats because we need good people and we need to have the appropriate number of people and I think we were struggling to replace a lot of those drivers and other things we need to, and not necessarily replace, but also add to meet a lot of the growth. And so, you know, but those two costs on the labor side and the gasoline side are really kind of less than 10% combined of our full operating costs. So we feel like some of that was really just needing to scale up and get the right people in the right seats. And I think we feel that we are pretty much there at this point. So, you know, we would hope that given that plus the price increases, we should really see an improvement there in the coming quarter and in the coming quarters to go.

Got it. Switching gears a little bit to growth, right? So, Pat, obviously you came from the long-term care industry and, as you mentioned, part of the Farmerica agreement. How do we – and I think there was even some comments on, you know, expect more growth from long-term care than retail this year. Yes, sir. How do we look at that – opportunity in terms of timing? What are some key milestones that maybe we could keep an eye out for to understand that that relationship is moving forward and gaining some traction with some of those facilities?

I think that's a great question. I'm going to spend Monday and Tuesday at the Argentum Conference, which is the leading conference for the private pay side of senior housing. It'll be the first time I've been able to attend there and wear the Sharps badge to that conference. There'll be 3,000-4,000 people there that I'm I'm the outgoing board chair, so it should give the company a little visibility. I'm not guaranteeing it will equate to sales. The metrics that I would watch, though, is the one I gave you today that I think is an interesting metric. Out of nearly 7,000 of these boxes across the country, most of them are in hospitals and veterans locations and one of our largest retail pharmacy customers. But only 900 of them are in post-acute care. And I can tell you the issue of having lived in that business for 25 years, it wasn't an afterthought. That's an overstatement. But it was way down the food chain in terms of dealing with medication disposition issues. But medication diversion is really an important issue in that space. And so I would watch how many long-term care facilities where we implement these. I talked to Dennis Halligan yesterday. He said, team leader on this, drives our sales and marketing here and was really instrumental in building out this Far America relationship. And it's just in the last several months that we have been introduced to the national sales force at Far America. So it's in the early stages. So let's stay tuned. We're going to figure out how to drive it the very best way possible through this industry. But it is a, I mean, I've been in building after building over 20-something years where you'll ask how those medications are disposed of because they most often come to you not in pill bottles, but they come in either multi-dose packs, but bubble packs of different types. And labor generally has to go through and empty those things out and then dispose of those drugs in a certain way. And the DEA rule in 2015, and I give David Tooth and the folks around here credit for developing this product, where all of the drugs can go in, they can all be disposed of, and in a very cost-effective way, we take them away and incinerate them. There's just a huge amount of runway in front of us there.

Gotcha. And then one final question, and I'll jump back to you. You know, on the route-based side, last year we also saw some benefit, I think, from disposal of PPE equipment out of long-term care. I'm just curious if that has sort of normalized, you know, as well in sort of this sort of post-COVID environment that we're, you know, moving into.

Yes, I think it has. It was – It was artificial. I mean, a lot of the operators, you know, during that whole quarantine period when grandmother got COVID, they stripped everything down, including bed mattresses and all. A lot of that stuff came through our system. Not mattresses, mattress covers and sheets. A lot of that stuff came through our system, which is artificially high. But, you know, there's not clear visibility yet exactly where we are in this post-COVID world. I think we're all hoping that it's a post-COVID world or, you know, the word endemic is overused, so I'm not going to use that today. But it is. I think that's rationalized. Unless something new happens in terms of the pandemic, I don't think you'll see those artificial bubbles like you saw in this quarter a year ago.

We saw about $250,000 of costs in last year's route-based numbers that we really could see was related to COVID activity. That's a little bit of the headwinds in the comparison to last year.

Having said that, businesses And I can't quantify this, Jerry, but those businesses are doing business differently now than they ever did before. There will be more gowning, more masking, more caution, because as we all know from the data, they were the hardest hit because it's the most frail population in the country.

Got it. But suffice to say, we're sort of in a normalized environment for all intents and purposes.

It appears we are. Okay, got it.

That's perfect. Okay. Thank you very much. I appreciate you taking my questions.

Okay. Thank you.

Your next question for today is coming from Rob Brown. Please announce your affiliation, then pose your question.

Hi, Rob Brown with Lake Street. Thanks for taking my question. First question is really on the margin. Your first thing is recovering. Where do you think, can you get back to that low 30s range here pretty quickly, or does it take a few quarters? What's sort of the ramp rate you think on that margin recovery?

Yeah, I think, and to your point, we touched on that a bit, I do think, that we should see that between the price increases and also just some of these costs, which like we said, I think some of that was just getting the right people in the seats. And I think we've passed that at this point. So I would expect that we would see that come to normalize to more of that level over the next couple of quarters.

Okay, great. And then on the mailbag business, how much COVID impact do you think remains possible there And how is the inventory in the channel at this point? Is it normal or is it elevated left over from COVID?

Yeah, sure.

So, you know, as we mentioned, year to date, we've done about 9.3 million of immunizations. I think as we look forward to the next quarter, we've got about 1.4 million on buildings to date. And I think, frankly, we expect that. to kind of be the way the fourth quarter shakes out. So I think between that, the inventory we do think is more normalized. I think what we're really focused on now between the inventory and the revenue is frankly, how can we get this going forward to be a bit stronger? And I think the mailbacks themselves have done a good job of focusing on the COVID. I think what we're really looking forward to is where at this time we're going to see that shake out.

Yeah, it's interesting. If you look at the data and some of the graphs we look at internally, the immunization line seems to have settled out pretty substantially above where it was pre-COVID. If you take that 2.9 million that Eric just mentioned in the third quarter of 2022 and you go back to the third quarter of 2020, which is a bit of an artificial comparison, but it's pre-COVID, that immunization number for that quarter was I think $700,000. So that's a substantial elevation and You know, you can read all the information that we all read, and there's just not clarity yet on the level of boosters. You've got two-thirds of the country is fully vaccinated. You've got another 45% of that number that's got one booster. How deep and how far and how hard all that goes, I think, remains to be seen. That's right.

And I think, as we mentioned on the inventory, we've seen a lot of offer and off. Correct. Correct. So I think it's really at this point, is it more of a just-in-time versus some of the lumpiness we've seen in the past? And I think as of now, we're seeing it kind of normalize a bit more versus the lumpy ones.

Okay. I just wanted to clarify in your statement, did you say $1.4 million of billings thus far in the quarter? That's sort of what you think? Yes. Or just the immunization?

We have $1.4 million of billings in hand today. So there could be more that come this quarter, but that's what we have right now.

Through early May.

Through early May. Yes.

All right, thank you very much. I'll turn it over. Thank you.

Your next question for today is coming from Michael Hoffman. Please announce your affiliation, then pose your question.

Hi, good morning. Thank you very much. Pardon my voice. I've managed to lose it somewhere. If we could talk about some of the short-term aspects of growth, and then I have a bigger, longer-term sort of Where do you go? And within the context of the MedSafe, the business pre-COVID had been on a pace of 300, 400 installs a quarter, call it 1,200, 1,500 a year. Right. Can we get back to that without the assisted living and then add assisted living to that?

Yeah, we think that's reasonable. We think that's reasonable. We think there's a whole deep market, though, in – it's not just assisted – it's senior care generally. It's assisted living and skilled nursing.

Yeah. So the point being is there's a back to normal and then an incremental. And what's the thought of, again, all the reasons why that got deferred, you know, the pharmacies – we're distracted and everybody's distracted around COVID, but, you know, even in your own words, and we're not calling it endemic or any of those things, but it seems like, you know, life's getting back to normal. So what's the visibility on the return to that 300 pace before you then get to add the incremental?

We haven't seen any indication from our customers that they plan to stop their continued investment in the programs. So that could change. But we have not seen any indication that they will stop adding units going forward.

OK. So you did a little over 100 in this last quarter. Are you seeing it ramp back towards that 300 in the fourth quarter?

We won't see investments from our larger customers in this calendar year. They've definitely said there's a pause this year. And I think we've talked about that in prior quarters. But after this calendar year, there's an expectation that it would continue.

Okay. It's just to belabor the point. We all have to remember that's straddling two of your fiscal years, so it's your first year. Exactly. Okay. All right. Yes, sir. On the, pardon me, within the context of the cost issues, Are there structural limitations on being able to do things like surcharging or fees that help extend the point of leverage of trying to manage this inflation as opposed to only relying on a unit price?

There aren't any structural limitations. We just need to decide how we want to address that, and whether that's the approach we want to take or not.

It's a pricing discussion, and it's a philosophical difference that this company's had historically from some of the other competitors. That, frankly, has been a positive point of differentiation in the marketplace, but I get your point. We will look at everything. We're going to be smart.

We've got to grab it. Yeah, it's just with, you know, expanding your optionality, I mean, I get, you know, the best opportunity is to raise absolute price, but... Correct. If there's pressure on that, is there other options in an effort to recover some of this inflation?

There are, and we don't think there are any structural impediments to doing it. It's an ongoing discussion point here.

Excuse me. And then I don't think you guys do this management change and continue at a pace that's a nice pace of growth, but it's on a low base. So I'm asking a question that I realize probably gets a chuckle, but how does this turn into a $300 or $400 million revenue company and when?

You've got to chuckle. That's my goal. No, that's all right. It's respectful. This $70 million platform ought to be twice or three times as big as we are, and that's our goal is to do it in a thoughtful way. We've got good organic growth embedded in the company. We have, as Eric pointed out a minute ago, one of the things that David Pusa did, David Martin did, a lot of other people around here, is over the last year, we built out the infrastructure. We have the drivers, we have the locations, we have the dispatch centers, transfer stations, we have all of the infrastructure to grow this company and the great product offering on an organic basis. Eric and I are looking two, three times a week. We are in live conversations with our pipeline, and we're trying to figure out how to grow it and take bigger steps in an appropriate fashion. I'll just say it that way. There are some companies out there that are more, that are bigger. The Midwest acquisition is a very good acquisition. The affordable one up in Indiana is a good acquisition. But we want to be wiser. We want to be prudent. But we need to accelerate. So I think out over the next several years, you should see us grow our revenue like I thought about.

And you do have a very admirable organic growth rate, albeit off of a small base. So it's a slower rate of acceleration in the context of how does it turn into a $200 million revenue company, which means M&A. And I was just curious about your thoughts about while staying disciplined around returns, being able to pick the pace up and sort of the addressable market, the willingness of the seller, you know, you have to have a willing seller, are they being pragmatic about valuation?

Yeah, you know, it's interesting. Eric has had, we were talking yesterday about this. It is, when we look at some of the situations where we're looking, one of the interesting, it's counterintuitive, but it's an opportunity, is that you've got to go back and look at a business that's operated over the last year or two. If you're looking at their numbers, you've got to understand how much of that is artificial, how much of it is COVID. And so I think there is a sort of coming back to the earth dynamic that's going on out there where owners are, they've had artificial quarters like the whole industry had during this same time period a year ago. And now what does their business really look like going forward? And One of the things that we offer a potential seller is that we've got the scale and we've got the infrastructure and practically the economies to take on their business without a lot of incremental infrastructure. I think that dynamic, we believe that that will be an important dynamic as we continue to push conversations. I hope that makes sense to you.

Do you feel pretty good about a pool of Because to get this to a 2 to 3x, so 200 million, compounding on the organic side, basically there's got to be somewhere between 50 and 75 million of M&A too. Is there 50 to 75 million of companies willing to sell?

We believe there are targets in that. Yes.

Yes. Okay. Great. Thank you very much.

Thank you, Michael.

Your next question for today is coming from Kevin Steinke. Please announce your affiliation, then pose your question.

Good morning, Kevin Steinke, Barrington Research Associates. Hi, Kevin. Hi. So just continuing up on that discussion about scaling the business and some discussion there about the acquisition pipeline and But, you know, when we think about scaling the business from an organic perspective and gaining greater penetration of the long-term care market and professional market and the others, is that something where you feel like you need to apply more business development resources and sales resources to accelerate the pace of organically? Would you be willing to make the upfront investments maybe at the cost of the margin side in the short term, I guess?

All of those issues are on the table. I've challenged conversations as recently as this week, our sales and marketing leader, to rethink how we attack channels and all of that stuff. We're doing things very well here, but we need to think We need to be a bit more nimble, and we need to think about how we accelerate that growth on the organic side. And yes, the business development side, the conversations that Eric and I are having, yes, currently. So yes is the answer to both those questions.

All right, great. I don't know if it's possible for you to nail this down given the continuing changes and inflationary environment. But do you think previously it's been talked about incremental gross margins of 45% or so. Is that still a reasonable way to think about the business?

It is, and I think as we've done the acquisitions and some of this other activity, we do feel like that's still a good number. I think we're going to wait and see on some of this inflation. I think we've seen a lot of it, and frankly, we are doing the price increases to get there, so I think we're pretty confident in that still being the number.

Okay, thanks for taking the questions. Appreciate it.

Thank you.

There are no further questions in queue. I would like to turn the floor over to Pat Malloy for closing remarks.

Thank you. First of all, I appreciate everyone's time this morning, and thank you. In closing, I do want to leave you with just a few thoughts. First, as we noted, we corrected a one-time invoice in issue this quarter caused by billing errors with our largest carrier. The restatement of costs only affected the current fiscal year, and in no manner affected our revenue, our cash flows from operating activities, or any of our cash or cash equivalent positions. Second, looking ahead. We believe that Sharp's best days are in front of us. We have a great operating platform with three critical lines of business. Mailbox, route-based, and unused medication disposition. In this third quarter, our route-based business billings were up third quarter, over third quarter, by 12%. Our route locations increased 21% to almost 19,000 customer locations. Listen, I didn't, I mean, I knew the number, but I didn't really understand this data point until this week. But this is the first quarter in the company's history that our route-based revenue exceeded $4 million. That's a tremendous milestone. Our professional market buildings grew quarter over quarter by 19%. MedSafe liner shift increased 20% quarter over quarter, validating our model. Non-COVID immunization revenue increased 24% quarter over quarter from $10.7 million third quarter of 2021 to $13.2 million in third quarter of 2022. As we've talked about repeatedly, we've made a conscious investment to build out our infrastructure and to grow this business. And we are going to continue to aggressively pursue both organic growth and acquisition opportunities. I want to thank everyone for your time. Appreciate it. I look forward to speaking with you the next quarter. Everyone, take care.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.