John Nesbett - IR, Institutional Marketing Services David Tusa - CEO and President Brandon Beaver - SVP of Sales Diana Diaz - VP and CFO

Joe Munda - First Analysis Brian Butler - Stifel Nicolaus Kevin Steinke - Barrington Research Craig Hoagland - Anderson Hoagland Shawn Boyd - Next Mark Capital

Good morning and welcome to the Sharps Compliance's first 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 the Company's sales initiatives and related activities.

Immediately following their formal remarks, we will take questions from our call participants. If you are listening via the webcast, please note that you have the ability to submit questions through the internet.

As you are aware, we may make forward-looking statements during the formal presentation and in the question-and-answer portion of this teleconference. These statements applied to future events, which are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from where we are today.

These factors are outlined in our earnings release as well as in the documents filed by the Company with the SEC. These can be found at our website or at sec.gov.

So with that, let me turn the call over to David to begin the review and discussion. David?

Thanks, John. Good morning, everyone, and welcome to our first quarter 2016 earnings conference call.

We had a good start to the fiscal year 2016 quarter. We generated $7.9 million in revenues and increase of 12% over the prior year.

This was led by increased billings in the Government, Professional, Home Healthcare and Assisted Living Markets. Gross margins for the quarter were 37% and we generated a $0.01 share in EPS.

While fiscal 2016 was off to a good start, we did see some shift in billings in the retail and government markets from the September to the December quarter. So while it's impacted our first quarter, we do expect to deliver record results in the December quarter, a quarter that is historically very strong anyway.

So let's talk about some of the markets. First professional market, it grew 18% to $1.7 million in the first quarter, as we continue to rollout sales and marketing initiatives around our Sharps Recovery System and our new route-based pick-up service.

We focus on the small quantity generator sector. A recurring revenue based largely made up of doctors, dentists, vets and other healthcare professionals.

We believe our comprehensive service offerings reflect the mailback and the route-based pick-up service offer our customers choice. Choice of services, also cost savings and operational efficiencies.

Next let's go to government. The billings increased by 246%, it's about $500,000.

This was largely driven by demand for our MedSafe solution. Probably for the last 12 months, we generated $2.1 million in billings in our government sector.

The MedSafe meets all the requirements of the new DEA rule, the secure and responsible Drug Disposal Act, which allows the collection transportation and treatment of consumer dispensed unused medications including controlled substances. Both our MedSafe and our TakeAway Envelopes solutions have been approved and added to our Federal Supply Schedule as well as our Data Schedule for our purchase by the Department of Defense.

So the GSA [indiscernible] enables efficient purchase by government agencies. The assisted living and home healthcare market billings increased 17% and 11% respectively.

Assisted living billings benefited from an increased sales focus as well as any route-based pick-up service. Home healthcare billings increased due to the timing of distributor orders.

Now the retail market billings were down a bit, they were down 12% to $1.7 million in the first quarter. And this is due primarily to the timing of large flu shot orders for the coming season, which we again as I mentioned earlier push expected billings to the December, 2015 quarter.

Looking at trailing 12 retail market billings increased 29% to $8.5 million. We remain confident that the retail market will continue to drive long-term growth.

As customers increasingly gain to alternative shots for their flu shot and other immunizations. The last market, the pharmaceutical manufacturer market.

This market was down 11% to $1.2 million and this was related to the timing of inventory builds. For the trailing 12 period, going through the market was $4.7 million or an increase of 4%.

So during the quarter, we filled orders for inventory builds for two new patients support programs that were launched in 2015. We expect to launch two additional patients for our programs for new drug therapies over the next three or four quarters.

And once these programs are fully rolled out, these programs should generate an additional incremental revenue about $4 million a year. We're also looking for a strong December, 2015 quarter in the pharmaceutical manufacturer market, as we expect inventory builds for three or four of our larger patient support programs.

In addition to the organic growth in all of our key markets, we believe it's important for us to launch new and successful service offerings that fill the need for our customer base. We're seeing success from the addition of the new route-based pick-up service and from our recently introduced our new medication solutions the TakeAway Envelopes as well as MedSafe.

These new solutions are gaining traction particularly in the professional, government and assisted living markets and contributed to the success of our inside sales and online sales channel, which grew by 27% in the first quarter. Now with that, I will turn it over to Brandon and he'll give us an update on the sales initiatives.

Brandon?

Thanks, David. As David mentioned, we saw solid results in the professional, assisted living and home healthcare sector this quarter.

The retail and pharmaceutical manufacturer segments were down in the first quarter, due mostly again to the timing around large flu shot orders and the timing of these patient support builds. These are both important growth markets for us.

As we sometime see consistency and as we've said before lumpiness from quarter-to-quarter. Likewise as David mentioned earlier, we are anticipating a very strong December, 2015 quarter in both of those markets.

On the retail front, we're unique because as retail locations expand their healthcare offerings to meet consumer demand, we provide a customizable blend of solutions to meet their needs. Likewise, our relationships in the pharmaceutical manufacturer market are very strong because our partners recognize the value for our unique solution.

We offer not just the disposal solution for patients in the home setting but an opportunity for pharma branding and data generation related to the patient compliance and medication adherence. We're seeing many opportunities for pharma with programs for new self-injectables, new drug indications and higher patient counts.

Assisted living billings, show continued strength in the first quarter increasing 17% as a result of dedicating our resources to closing new customer deals, converting untapped opportunities and reflecting results from our new route-based pick-up services, which is well suited for this market. This sector can generate higher growth and we believe the recent expansion of our route-based pick-up service will be an attractive option for growth in assisted living long-term care market.

Our sales team is able to operate complete compliment of waste management solutions including medical with both the mailback and route-based pick-up pharmaceutical, hazardous, universal and patient-dispensed unused medication. In fact, two large multi-sized field sales deals closed this month, which included three of those service offerings.

This is all part of our plan of being a comprehensive service provider. Let me give you a brief update of our sales team and where we're at right now.

As of today, we have five field sales personnel, 12 inside sales personnel and seven sales support personnel. We're total team of 24 employees.

Now let me spend a second on the sales support personnel. Out of those seven, we have three that are dedicated specifically to regulatory and we feel this is very, very important vital part of our business.

As an experienced team focused on executing on new opportunities, onboarding new customers and accelerating our closure rates. David, I will turn it back to you now.

Great. Thanks for the update, Brandon and let's have Diana address the financial side.

Diana?

Okay, thank you, David. During the first quarter, the company recorded revenue growth of 12% to $7.9 million as compared to $7 million in the first quarter of last year.

Gross margin was 37% in the first quarter as compared to 33% in the prior year first quarter. The margin increase was driven by the leverage gain from higher revenue.

Selling general and administrative expense or SG&A increased to $2.6 million for the quarter and remained flat at 33% as a percentage of sales compared to the first quarter of 2015. SG&A for the first quarter fiscal 2016 included $0.1 million of acquisition related cost associated with our acquisition of Alpha Bio/Med in July, 2015.

Without these acquisition related costs, SG&A increased 8% compared to the first quarter of fiscal 2015. Exclusive of any potential acquisition related cost, we expect SG&A to be about $2.5 million per quarter for the next three quarters.

The company reported operating income of $0.2 million in the first quarter as compared to an operating loss of $0.1 million in the first quarter of fiscal 2015. Sharps reported net income of $0.2 million or $0.01 per basic and diluted share this quarter compared with a net loss of $0.1 million or basically zero per basic and diluted share in the first quarter of last year.

EBITDA for the first quarter of fiscal 2016 more than doubled to $0.4 million as compared to EBITDA of $0.2 million in the same quarter of last year. Our balance sheet remains solid with $16 million of cash and cash equivalents at September 30, 2015 compared to $15.2 million of cash at June 30, 2015 with no debt.

At September 30, 2015 working capital, stockholders equity and total assets were $19.4 million, $24.2 million and $30.3 million respectively. Inventory of $3.4 million at September 30, 2015 is higher than the balance at June 30, 2015 of $2.7 million.

The increase in inventory is a direct reflection of growth in the business as well as preparing for the flu shot season. And with that, I'll turn it back to you David.

Thanks, Diana. Just couple of comments before we turn it over to the Q&A.

in addition to organic growth. The new product and service launch as we believe acquisition should play a role in the strategic growth of the company.

We closed the Alpha Bio/Med deal in July of 2015 and we're looking at additional acquisition opportunities that focus on serving our core recurring revenue small quantity generator market. We will remain discipline and focused as we consider these acquisition opportunities.

We've also begun to process to expand our infrastructure in the North East, to include an additional treatment facility and distribution warehouse. We have a high concentration of business and prospects in the North East, which we believe will be well served by the infrastructure expansion.

We expect the expansion should be operational in 12 months or less and again, we believe it could play a key role in the growth as a company. And with that operator, let's open it up for questions.

Good morning, guys. Can you hear me okay?

Yes, good morning. Joe.

Good morning, first off, Diana. Your latest comment on inventory the build there.

Can you give us some idea of how much that inventory is related to flu shot currently?

It's only about $300,000 or $400,000.

Okay and then David, as far as some of the pushout in orders. Can you give us a little bit more clarity as far as what exactly went on the retail side, it seems to be a little bit lumpy here.

Strong last quarter, a little bit of a fall - a big drop off into this quarter. Can you give us some sense of what's going on there?

Because you're projecting a very strong even a record quarter for December and I just want to kind of get some of the dynamics that are going on.

Sure, Joe. We had about, we estimate it was about $500,000 of flu shot related business, that came in early October that we had forecasting for the September quarter and then also about $500,000, we expected about $500,000 more in government business.

Well the government business was strong at about $500,000 we were looking for something closer to a $1 million. I'm sorry, yes to a $1 million for the quarter.

So we were looking more for like a $9 million quarter. I mean, how many times do you heard me say that it's a lumpy business and the orders can, the timing of orders can impact a quarterly results.

That's why, I talk about things on a trailing 12 basis.

Okay, thank you. That's very helpful.

And then I guess my final question, pharma support program here, little bit of a drop off with these new programs coming on. It's I guess a two part question David.

Can you give us some sense of what the sales cycle is like for that side of the business and you're talking about strong pharma Q4 here with three to four programs possibly coming on. Can you give us some sense of what that might look like going into the fourth quarter?

I'm going to let Brandon, take that one.

Sure. And we mentioned some of the builds, that we anticipated for this quarter should be significant for a couple of our existing programs.

We do have in the pipeline to close several larger deals over the next due to three to four quarters. A lot of that is dependent upon FDA approval, the manufacturers that have come to us and said hey, once this happens, we're ready to go, but some of that is kind of taking a stab at some of the timelines.

I will say the manufacturer business that dropped a little bit, this last quarter is not uncommon. As we get closer to the year end, manufacturers look at using some of those dollars prior to going into the New Year, so therefore that's why we've said this calendar Q4, should be a very strong quarter for us in that market.

And Joe I mentioned as well, the three or four inventory builds we'll do in the December quarter are with our larger patients for programs. So pharmaceutical manufacturer billings, they're usually big in the December quarter anyway, but this will be focused on the larger program.

So we should see or we expect to see a strong billings in the December quarter for pharmaceutical manufacturing.

Okay, thank you.

Good morning, thanks for taking my questions.

Good morning.

Just first on the retail and the government. When you talk about potential record quarter, does that potential record second quarter record or just overall quarter of the record in the sense that, you could be exceeding fourth quarter, 2015 where you had $3.1 million in retail $800,000 in government.

I think, when we talk about record for the company, but I guess a record is $9 million in the billing. So yes, we're talking about number [indiscernible] I guess, revenues in the December quarter.

Okay, so I just want to make sure I'm measuring that up the right place. And when you looked at the professional segment growth, was that all organic or were you getting any contribution from the recent acquisition or also from the route-based, if you could break that out at all?

Oh, I will take that. We had about, what was it $70,000 or $80,000 that was from the acquisition.

In the professional market.

In professional market and the rest of it was organic, but you understand the acquisition as well as what we do on the pick-up service side is benefited by, are benefits more than just professional. We're seeing strength in pushing the long-term care side.

Right.

Right.

The long-term and professional markets are the two markets that really benefit from that additional service offering.

Okay and when you think of expanding into the North East, any color or update on what you think that potential opportunity looks like for 2017?

We're pretty worked out, we're focused on that area. We do have a couple of other deals that we're looking at and I'd really like to say that for when we close the deals, we can give a little bit more color, but we liked it.

We like it, that's a great area the top billing. We do a lot of business up there and a treating facility, just use the warehouse in the North East it's going to be very valuable to us in growing the business.

We've seen as well with the addition of new service that we've seen growth on both inside sales and field side also. Now they have an additional service offering, they work very [indiscernible] start on the North East and that's densely populated in the country.

Okay that's helpful and switching I guess to the government side, where you saw about $500,000 looks like you pushed into December. Is the right way to think about the government in the way its ramping first quarter for 2016 should be the lowest revenue quarter.

I mean, as this ramps or is there a seasonality swinging government that actually will one making third or fourth quarter potentially, the lower quarters.

I'd say, that's one of the markets I really all I can guess, to guess. You know let me just say government, with the $2.1 million over the last four quarters in government, they like what we have, they like and let's say, they like the TakeAway Envelope and they're buying it and we think that there's opportunities for higher levels of orders.

Can't guarantee it, but the timing of those are just, are just always very difficult to predict. But again, $2 million revenues over the last 12 months we think is a good start.

But your expectation is, that's going to continue to grow in 2016.

We sure, hope so. We expect it too and it's the service offering is popular, they like it and we hope, it's just.

That's just a sector, it's just far more difficult to predict timing, but that's what we're all for.

Okay and in home healthcare with the strength you saw that with I guess some timing of orders. Is that still really just to be thought about as kind of a low single-digit grower or has something shifted here that it might actually be a little bit in 2016 than in past?

No, I think that's, the best way to look at that is, just the way you explained it. We had the lumpiness in the orders at work in a positive sort of way, this quarter.

But I think, what do we do for the 12?

The trailing 12 months were down, 1%.

So I think, we look at that one from really single-digit. Single-digit positive growth, same way that you explained it.

Okay and then more macro side, any thoughts on the potential impact of the merger between Walgreens and Rite Aid on the retail piece?

They're both great customers and we work with both of them every day, we have great working relationship with them and we save the money every day with our mailback that's used on the flu shot and the immunization side. So we don't expect anything adverse.

Okay and then just, two housekeeping. Do you have a CapEx for the first quarter 2016 and cash from ops for first quarter?

It will be close to our EBITDA CapEx, we didn't have anything that was large. Other than that, the acquisition of buybacks.

Other than that, the maintenance CapEx about $500,000 a year so probably, what $100,000 - $150,000.

Exactly.

And the cash - most of the EBITDA.

Okay, great. Thank you very much.

Good morning, everyone.

Good morning, Kevin.

So it sounds like, based on your comments that you're pleased with the progression of both your acquisition in the North East as well as the launch of your route-based pick-up service in the Texas market, is that fair to say?

Yes, we're pleased. We're pleased with what we're doing.

The route-based in the North East is [indiscernible] what we're doing in Texas. I think, you know what Brandon mentioned earlier was really important.

If you look at the larger deals that we're closing they all have an element of the pick-up and I think two of them that were closed, even had hazardous waste services as well. The customers are looking for a comprehensive provider of services.

So the more that we can offer, that from a complementary standpoint then the better for us, not thinking of the ability to offer about the pick-up and the mailback as well. The hazardous was positive in closing the last few sales, wouldn't you say, Brandon?

Yes, definitely. Absolutely and to touch on that Kevin.

One of the deals actually had about 60-40 split, mean 60% of the rotations had a pick up element and the other 40% had a mailback element with all locations having a hazardous waste element. So to David's point, certainly we've been able to, we have become a comprehensive provider.

Okay, great so based on that early success, what's the appetite for building out route-based service and other geographic markets either through acquisition or an internal launch?

Well right now we're focused on the North East and Texas against well Louisiana as well. Texas and Louisiana and North West.

We're looking at some additional opportunities potentially in the North East, so that's where we're focused right now. We may look at other geographic areas down the road, but we're going to do this on a methodical sort of way, we're going to do this with the right opportunities and we're just going to be prudent and we're just going to make sure as we deploy capital, we're going to deploy in such a way, we think it's going to benefit the long-term growth of the company.

Right, okay that makes sense and I guess that would apply to potential additional waste treatment facilities down the line. You probably have to have a route-based service there ahead of other treatment facilities, I guess.

A large enough density [ph] in a particular market to have another facility elsewhere.

That's correct.

Okay, great. All right, well that's all I have for now.

I'll jump back in queue. Thanks for taking my questions.

Thanks, Kevin.

Good morning, circling back to the government revenue for a moment. Do you have an insight into whether those are essentially stocking orders or do you have an idea that these orders are being used in real time?

Well they're being used. I mean the MedSafe is, we're very pleased to say that the MedSafe is in many, many different government healthcare facilities.

We're proud to push service through and the TakeAway Envelopes are being used and issued to patients as we speak.

Okay and then on the pharmaceutical segment. It was a little surprising two new programs start this quarter, yet revenue is down year-over-year.

Would it be fair to say these were smaller programs than the two you expect to come on in the next three to four quarters?

These were two programs that launched last year. So they were reorders, re-supply orders for the program, which to me indicate that the fulfilments are going well, the patients are coming in and using the solutions and they need more for our future orders.

So it's an extension of the programs that launched last year, last fiscal year.

I see, I misunderstood, so there were no new programs launched in the first quarter?

No new program, it was, the new ones that launched last year, that had new orders.

Got it, okay and then last question, the professional revenues grew about 17%. The online and inside sales revenues were up 27%.

Can you just explain the gap between those numbers? Are there other segment?

Yes, there is other segments. The online and inside sales, they cover more sectors than just professionals.

They'll cover assisted living and long-term care being [indiscernible] professional. So the other way to look at the professional because that's a key market for us, other grew [ph] 18% for the quarter it's 23% on a trailing 12 basis up 23%.

It's another one of these markets that we benefit from these on the near service offerings through launch.

Right, okay. Thank you very much.

Thanks, Craig.

Just a quick follow-up. Brandon, you had talked about the hiring of three regulatory seven support people comprised with three regulatory people.

Are these new hires to the company and if they're not or if they're not? Can you give us some sense of what particular markets they're going to be focused on, as far as the regulatory is concerned?

Sure, Joe. So these three hires have been onboard now for a minimum of a 1 year.

Several of them been there for quite a while and they really support our entire field sales and internal sales department. Really to be honest, that is for the entire company from a regulatory standpoint.

They look at all states of jurisdiction in all markets, anything from home and health to long-term care and look at the DEA regulations, they're looking at hazardous waste regulations, they're looking at EPA regulations. They're truly a valuable asset to us and we go in and offer our services to our customers, they literally tag along with us in support of the sale to help really bolster our program.

Okay and if you were looking to add under that sales force structure, where would it be on the inside sales or field sales or on the regulatory front?

Really right now, we're having significant success as David just mentioned in professional market, with primarily I mean inside sales in general. We've really I think kind of got it down some process in place and if I had to say, if I had kind of crystal ball here.

I would love to be able to see 20 or so inside sales people by the end of the fiscal year. With that said, I previously stated that we're very prudent with our resources, allocation.

But in the same vein, if we need to add additional bodies, we'll do it at the right time and we'll do it methodically. But inside sales is probably where we're going to gear additional sales folks.

Okay and I guess my last question for David regarding flu shot season. Have any of the retail pharmacies come back to you.

I know, I think Brian had mentioned, the merger possible tie up between Rite Aid and Walgreens. Are they coming back to you with any sort of pricing pressure as far as business is concerned?

Are you seeing any push back from some of these retail pharmacies as far as pricing is concerned?

No, we haven't seen anything.

Okay, thank you.

Good morning, can you hear me?

Yes, good morning, Shawn.

Great. Good morning.

So just to follow-up on a couple things here. On retail, with the push of the $500,000 into the October quarter.

I'm assuming that's already booked at this point?

Does that $500,000, that is yes.

And on the government push up?

No, that's not yet.

Okay, but you expect it to come into this quarter.

Right.

Okay and on the retail, I'm also from - what I'm hearing aside from the quarterly shifts. The growth rate that you've looked at over the trailing 12 months.

I'm just kind of looking back here. We've done that for couple quarters in a row.

Anything changing that keeps you from looking at that growth rate again going forward?

I'm sorry, what market?

In terms of retail, that business is growing 25% to 30% a year, a 2 years in a row. Not just trailing 12 months.

So well you've all talked about big opportunity here etc., but anything changing on that front that makes you bring down that growth rate?

Not that we're aware of anything, I mean that business has grown just as we're selling more and more flu shots administered and more importantly [indiscernible] in the alternate side, which is the retail play. So we haven't seen any change in that trend.

Got it, great. And then, this question was asked actually on the home healthcare but I want to take it over to your assisted living, that business did very well this quarter and it's actually a couple quarters now, kind of high teens growth.

So I'm looking at that saying well, all right am I running a higher trajectory here now and you mentioned the route-based or the addition of route-based service. So is that kind of kicking this into a higher growth rate here?

That assisted living market is been, we've been working on for a while and it's one to where the route-based pick-up appears to be a bit more prevalent, in the market than the mailback. So we offer above then yes, I think the addition of the route-based pick-up is helping to accelerate that growth.

Brandon, are you going to give some color on that.

Sure. I think it's going to continue, we - our pipeline as we look at long-term care and in general Shawn is, it's got a significant number of multi-sited locations for long-term care and as David just alluded to base on our preliminary research and speaking with some of these prospects.

It absolutely - the pick-up side of this will fit perfect into some of those. So we anticipate our inside sales, in somewhat to our field sales.

But definitely our inside sales really hitting, a significant portion of that long-term care market and pushing them into the pick-up sector.

Okay, that's great to hear. Okay, that's it from me.

Thank you.

Thanks, Shawn.

Thank you operator and thank you, everyone for joining our call. We appreciate your support and we look forward to speaking with you next quarter.