Apyx Medical Corporation (APYX) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Bovie Medical Corporation First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Hosting today’s call will be Robert Gershon, Chief Executive Officer of Bovie Medical Corporation. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note this event is being recorded. Before we begin, I would like to make the following Safe Harbor statement. Today's call will relate to Bovie's first quarter 2015 earnings results and will contain forward-looking statements regarding predictions about future events. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. The company assumes no obligation to update or supplement any forward-looking statements, whether as a result of new information, future events or otherwise. With that, I would like to turn the call over to Mr. Robert Gershon. Please go ahead sir.

Thank you, Rocco and thank you all for participating in this morning's conference call to discuss Bovie's first quarter results and to review our full year 2015 performance goals. Joining me today are Peter Donato, our Chief Financial Officer; and Jack McCarthy, our Chief Commercialization Officer. Q1 was an eventful period for Bovie Medical. First and foremost, we began to see the traction in J-Plasma sales that we have been working towards over the past year but didn’t start in earnest until the fourth quarter of last year when we launched our Pistol Grip configuration and hired nearly half of our field sales team. While we are not anywhere near the run rate that we anticipate over the near-term, we did post first quarter J-Plasma sales that were 35% ahead of total sales for all of last year; more on that in a moment. Second, our core business continued to progress well and virtually mitigated the quarter-over-quarter decline in our OEM business, which tends to be uneven on a quarterly basis. The OEM decline was expected as we were comparing against a strong quarter in 2014 which included a one-time large order. Third, we were able to take advantage of market conditions to raise the funds needed to support the accelerated commercialization of J-Plasma. The decision to go to the market at this time was made based upon our priority of having the capital needed to drive J-Plasma sales growth without taking the market risk of waiting until later this year. And fourth, concurrent with the capital raise, we were able to reach an agreement with Great Point Partners that resulted in their converting their holdings into newly issued Series B convertible preferred stock which means that beginning next quarter, we will not have to utilize mark-to-market accounting related to most of the fair value of warrant liabilities which over the last five quarters has resulted in wide swings in reported net income based on changes in our stock price. We believe these accomplishments represent a strong start to 2015 and set us on the right path for effective execution of our growth strategy. With respect to our core business, our objective is to continue to grow the business at a solid sustainable pace which we consider to be a mid single-digit rate. This will be achieved by ongoing improvements in upgrades to our existing product lineup, expanding to adjacent markets and adding new products through our own R&D activities. For example, animal health is a market that we have begun to address strategically and where we are seeing good initial response. In essence, we are offering our existing electrosurgical generator products with accessories that are customized to accommodate animal companions. We have gained the competitive edge quickly because of the wide recognition of the Bovie brand, its reputation for quality products, and the fact that we now have an executive dedicated to developing this business. Also, as you know, we brought on a new R&D Director later last year and he and his team are evaluating a number of product development opportunities based upon Bovie's existing patent portfolio. While it is too early to be specific on this, we do think there is value in our patent and product portfolio that can be unlocked over time with minimal expenditures. Included in our core business are OEM sales which tend to vary from quarter-to-quarter depending upon timing issues. We are working on several projects right now that are in various stages of development. So while we anticipated that revenues would be lower on a year-on-year basis in the first quarter, sales in this area are expected to pick up in the second half of the year. Now to J-Plasma where we saw strong sales performance in the first quarter which we achieved while maintaining our average sales price. J-Plasma sales were $283,000, significantly ahead of what we booked for all of last year and current metrics point to continued progress as we move through 2015. We ended the first quarter with J-Plasma having been approved by 35 Hospital Value Analysis Committees or VACs, up from 31 at the end of 2014. The time from approval to ordering varies by system. And once we get approval, we need to sell into the surgeons at each hospital. So, it is a process. Fortunately, we have the analytics to assist us in targeting those surgeons who are the most active in our target specialties. And we are very pleased by where we are in terms of our VAC approvals. In fact, J-Plasma is currently being evaluated by an additional 34 VACs at the end of Q1 and that number continues to grow. Also, certain of the hospital systems where J-Plasma has been approved, has given us the indication that our product, specifically the new Bovie Ultimate generator that combines electrosurgical generator with J-Plasma is set to become the new gold standard at their institutions, assuming we can produce and deliver the quantities they need as they replace their existing fleet of generators. There are no orders we can take to the bank just yet but they are a very positive indication of the potential for this product. We also made progress on ordering accounts which were up to 21 at the end of the first quarter from 18 at the end of 2014. As we’ve said in the past, we define an ordering account as one which is reordering the product, indicating that the account has adopted the technology. Again, this is a process and that it can take several weeks and sometimes several months between the initial order and the reorders. But we are pleased that these metrics are trending very well. The commercialization of J-Plasma and product development activities in our R&D group together accounted for 50% of the year-on-year increase in first quarter operating expenses. We believe we are at the operating expense run rate that we need to accelerate J-Plasma sales growth and continue to grow our core business. On the product side, we have the benefit of a very modern facility in Clearwater and contract suppliers in Bulgaria and China. Based on the current forecasts, we believe that our existing manufacturing infrastructure is robust enough to efficiently produce the significantly higher volumes we expect. To sum up, Bovie's first quarter operating performance represented a positive start to what we expect will be a strong 2015. I will now turn the call over to our CFO, Peter Donato, who will provide more financial details on the quarter. Peter?

Thank you, Rob. We are reporting first quarter revenue of $6.1 million, this compares to $6.5 million reported in last year's first quarter with the variance related to lower OEM sales this quarter. Additionally, we are comping against the strong Q1of last year when we benefited from a substantial generator sale of $600,000 in the OEM business. In fact, the OEM business is down nearly $800,000 from the year ago quarter. And as Rob mentioned in his remarks, in the OEM business, there are several projects that are currently in the design phase that should help us out later in the year when we expect the run rate of this business to be back to a $3 million annualized rate, as we exit 2015. Included in the $6.1 million of reported revenue was $5.5 million of core product sales which grew 1.7% versus last year with year-over-year growth coming from electrodes and medical lighting products. J-Plasma sales ramped up well in the first quarter. Sales were $283,000, almost four times higher on a sequential basis and 35% better than all of last year's sales which totaled $209,000. Our gross margin for the quarter moved up to 43.6% from 42.5% in the comparable period last year. We believe that this level should hold steady in the near-term quarters and then improve as J-Plasma sales contribution comprises a greater portion of our overall selling mix. Turning to operating expenses. First quarter OpEx grew about $2.2 million or 83% versus prior year with over one-half of the overall increase coming from J-Plasma related activities. This represents a $700,000 increase on a sequential basis as we continue to support the commercialization of J-Plasma, R&D for new products and the expansion of Bovie's business infrastructure. Specifically, R&D for the quarter increased 34% versus last year's first quarter at $446,000 compared with $332,000 as the R&D team has grown from a year ago as we continue to develop our J-Plasma product line and related product line expansions to further increase penetration. Professional service fees were up $73,000 versus last year, reflecting higher costs associated with the financial and conversion transactions that occurred during our first quarter. SG&A increased 85% or just over a $1 million to $2.2 million from $1.2 million last year. Ongoing and accelerated commercialization efforts for J-Plasma and growth initiatives in our core and OEM [ph] businesses were responsible for the majority of the increase and included J-Plasma specific marketing expenses including the purchase of the analytics to streamline our sales process, travel and training costs associated with the J-Plasma sales force, commissions and increased selling expenses across all business lines and transaction costs associated with the financing in the Great Point conversions. Lastly, salaries and related costs trended higher from a year ago by just over a $1 million. This increase includes cost related to the growing J-Plasma direct sales force, sales and incentive compensation for the executive team, I am sorry, salaries and incentive compensation for the executive team and other headcounts to support our growth. The first quarter operating expense level is expected to remain fairly constant for the remaining quarters of 2015 exclusive of anticipated increase in J-Plasma commissions. Now to operating income. We are reporting a loss of $2.3 million versus income of $58,000 in the year ago quarter. This loss was expected and mostly attributable to the much larger scale commercialization activities that occurred this year versus last year. Turning to the below the line items. Under mark-to-market accounting, we recognized a non-cash gain related to the fair value of our remaining non-Great Point Partners warrant liabilities of approximately $1.4 million and a final one-time non-cash gain of nearly $14 million related to the conversion of the original 2013 Great Point warrant while we took a charge of $9.6 million related to all warrant revaluations in last year's first quarter. Both last year's and this year's first quarters contained approximately $200,000 of charges related to the accretion of the dividends on our convertible preferred stock. These factors combined and netted net our GAAP income for the quarter was $12.9 million and translated to $0.57 per diluted share compared with a net loss of $9.8 million and a loss of $0.55 per diluted share in the first quarter of 2014. When we eliminate all of the gains and losses related to the warrants and preferred stock, we recorded a loss of $0.14 per share this year versus a loss of a penny per share a year ago on a non-GAAP basis. As Rob noted in his remarks, thanks to the conversion of the Great Point Partners preferred shares to a similar security without warrants and certain preferences, most of our mark-to-market accounting will be eliminated. So, our reported net results should be in line with our operating results, moving forward. Turning to the balance sheet. Unrestricted cash on hand at March 31, 2015 increased to $15.4 million from $5.7 million at year-end with a large increase attributable to our March equity issuances. The underwritten offering including an overallotment option consisted of 5.2 million shares of common stock at $2.50 per share. Net proceeds from the offering were approximately $11.5 million. We are currently burning cash due to the full commercialization efforts of J-Plasma. This trend will continue throughout 2015 but should level off mid-year and then decrease as we exit 2015. Back to you Rob.

Thank you, Peter. In summing up, I would like to review the performance goals that we spoke about during our recent investor road show with respect to the roll out of J-Plasma. First, we expect to increase the number of ordering accounts from 21 to a 125 by the end of 2015. We know this is a big leap. But with 35 VACs having already approved the product and another 34 actively going through the approval process, we had over half or 69 accounts in the pipeline at the end of Q1. Second, our objective is to have 250 surgeons using J-Plasma by year-end, up from 41 today. That represents a minimum of two surgeons at each ordering account on average which is the same ratio we have today. Next, we expect to expand our direct sales force to 20 from the current 16 which is likely to happen in the latter part of the year. And in terms of building further recognition and adoption, we are seeking to have a total of 10 to 15 independent white papers published on the product and to have the same number of key opinion leaders speaking about J-Plasma, all of which assist us -- in our securing VAC approvals. As you can see, we have our work cut out for us but each of these milestones have been developed through a bottom up approach based upon the visibility we have to our current pipeline. In conclusion, we have begun 2015 with positive momentum and ambitious growth objectives and we are confident that we now have the resources in place to execute efficiently. Rocco, I would like now to open the call to questions.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Dave Turkaly of JMP Securities. Please go ahead.

Hey thanks. I was wondering if you might be willing to share with us sort of your mix today of these 41 docs; any sort of round number, plastic surgeon versus OB/GYN?

The vast majority are in our targeted -- our priority targeted specialty which at the time right now is GYN. So, most of these surgeons are in the acute care settings. So, while we are not publishing the specific numbers a disproportionate amount are GYN surgeons with a few plastic surgeons.

And then, if you look at sort of utilization, what do you expect from an average account once it is established in terms of how many devices, I don’t know if you're looking it per week or per quarter but I was just curious to see what your thoughts were first day, and new accounts let's say may be compared to more established ones?

So, the way we think about it from a big picture perspective, as we do very simple math and as we do our internal modeling is this. We expect that once an account is established, each account will have two surgeons that perform two procedures a week, meaning four procedures total. And when you do the math from an average selling price, what that translates to is each account being worth $80,000 of recurring revenue, so that does not include the capital piece of equipment. So that's kind of the simple math. And if you take it out even further to our goals, we expect to have 125 accounts by the end of 2015 which translates to a run rate, a 12-month run rate of $10 million exiting 2015. And I think you asked also Dave, how it looks for new account. Just for starting, as you might expect in a new account, the first bump of revenue comes from the capital piece of equipment and then we ramp to that run rate I just mentioned of four procedures a week.

That's helpful. I got to tell you, I had a chance to speak to a bunch of docs; and two per week I think is very conservative. So, glad to hear that. Last one, if you look at these 21 accounts, how geographically diverse are they today; are you finding that sort of a clustered one hospitals gets and the docs help spread it to others, new buyer; are you really kind of covering broad part of the U.S today? Thanks a lot.

So, I'll answer that in general and kick it over to Jack if Jack wants to add more color. So, the way we've deployed our sales organization at this time is a very targeted fashion across nine states throughout the country.

Yes, those nine states are -- large front [ph] is our direct sales team and we have independents that cover other markets. So we're able to field, request throughout the country for any demand that comes up. So, we're pretty set here roughly to the 21 accounts.

Our next question comes from Charles Haff of Craig-Hallum. Please go ahead.

Congratulations on the initial role out of J-Plasma. I would concur with previous caller that mentioned that your two procedures per week is a conservative estimate based on my physician checks as well. But we always like you to be conservative. Couple of questions I had here on the five to ten additional white papers. What would be the specialties that you think those would be targeted for; would those be GYN only or would be there some derm or maybe some animal health in there? Do you have a sense for where that may shake out?

Sure. We are looking at expanding some of the papers in GYN; derm is also another focus for us, as you mentioned; and we’ll also have some economic papers in there as well to speak to that process.

And then your direct sales force additions getting you to about 20, can you kind of characterize what types of candidates that you're seeing out there, maybe some backgrounds or just any kind of some help you can give us in terms of the caliber of people that you're seeing?

I'll go ahead and start and turn it over to Jack to discuss further. So, we'll ramp to the 20 appropriately, as our revenue continues to build. So that’s why in my prepared comments I mentioned that will happen likely in the latter half. We like this size of our sales organization right now to help us meet our goals. But we will ramp up. So, the good news is the backgrounds in caliber of the reps that were attracting remained very, very high. So typically on average, these candidates have 15 years of overall experience and come from some of the largest players, as I have mentioned in previous calls such as Covidien, Ethicon, Intuitive and then some of the smaller specialty players who are also have very deep experience, Cryolife is an example of that. What we continue to do and just based on our experienced having done this for many years in medical device is we're always actively recruiting to build a strong bench of candidates. And what we are experiencing is very positive feedback from the field of candidates that are available that these are committed physicians. So with that, I don’t know Jack if you want to add any more color to some of the candidates that the caliber of candidates we're seeing.

The candidates that we have on-board right again are from the top companies and device and many of them are president club winner caliber reps and those are the type of reps that we continue to recruit and quite frankly who are seeking us. We're actively recruiting at all times. But again, we have a lot of inbound interest as well from that type of caliber reps in country.

And then I had a question for you about Ultimate and the roll out there. Have you started manufacturing the product yet; have you had completed Ultimate box yet? And if not, when do you kind of expect to be doing that?

We are very, very pleased to inform you that we have officially launched the product; in fact we ended up launching it a few weeks ahead of schedule. So, we did so in March and we are ramping up our manufacturing accordingly. So, it is a complete product and there is demand for the product and we have sold several generators.

And would you still be manufacturing the J-Plasma box or all the boxes going forward going to be Ultimate boxes?

So parting upon, ultimately they will migrate to the new generator. For the time being, we continue to manufacture both. And it will be a phase process. But certainly our goal is to migrate to the Ultimate. And in the very early innings of having this Ultimate out there, the feedback has been tremendous. And as a reminder, our vision in creating this Ultimate is as hospitals continue to replace their fleet of existing electrosurgical generators which only have an eight-year life, we produce the Ultimate to allow hospitals to replace their fleet with the Ultimate, getting the benefit of highest end electrosurgical generator which exists in all of ours together with the J-Plasma capabilities. And we're gaining traction with that strategy.

And then, I had a couple of questions for Peter here. Peter, on the gross margin improvement this quarter is very impressive. I think last quarter you said that pro forma gross margins were 38.7, so showing nice improvement from that level here with the 43.6. What were the drivers of that gross margin improvement this quarter?

We're generally just trying to take cost of the product as we've indicated over time and we also have efficiencies. We have a supply chain that spans across the globe. So, I think we’re a little bit ahead of schedule there. As I said in my prepared remarks Charles, I view the business kind of right around that 42%, 43%, and 44%. And that’s why I think we're going to be until J-Plasma gets a bigger proportion of the mix, then the work its way upward from now.

Peter, was the softness in OEM this quarter, did that help you on gross margin and any quantification you can give on that?

That generally hurts gross margin, believe or not; the OEM business is on the high end of our core OEM legacy business. So that actually hurt us a little bit. What hurt us Charles were volumes. We had roughly $400,000 worth of orders that we thought were going to ship in March that were actually either delayed or deferred in the core business, strictly core business, not OEM. So we had 200,000 that actually left the building but due to the accounting rules, will be recognized in Q2. And then we had $200,000 that came in very late in the quarter, last couple of days that actually couldn’t be fulfilled and actually went out. So, the margins could have been better based off of the volumes. But I think the number from a revenue perspective you can tack on a few hundred grand into the next quarter. But the margins themselves I think what we saw this quarter are reflective of the near term performance.

And then my last question on OEM. So, you had some projects that are planned for the latter stages of 2015 and OEM is not the key catalyst to the growth story here at Bovie but it is a little piece of it. How much visibility do you have that you're going be able to get to OEM levels that you have previously expected in the back part of 2015?

Yes, we have quite a bit of visibility. There are some variables. We are sometimes contingent upon our customers’ ability to meet their timelines or regulatory demands. But feel pretty good, as I said in my prepared remarks that we'll exit the year at levels that we were at a year ago, so which is about 700 to 750 or better per quarter run rate which translates into three plus million dollars of OEM business and we think that will come on line in the second half of the year.

[Operator Instructions]. Our next question comes from James Terwilliger of Newport Coast Securities. Please go ahead.

Congratulations on a very nice job with the growth in J-Plasma and development of that market. Most of my questions have been answered but I've got two more. You made some comments about some opportunities on the animal health side of the business and that’s a little bit new to me. Has that been a big area for Bovie in the past and how should we think about the animal health side of the business going forward?

Sure. I'll start and invite Jack or Peter to chime in if they have additional color to add. So, animal health, as you might know is a growing segment industry-wide and it’s one that our products happen to fit beautifully without the need to make any significant modifications whatsoever. So to us, we look at animal health as helping the industry fit, fill in unmet need where our products work beautifully. So what we've done, we know that we can grow this business and we have an internal goal, a mandate really to grow this business beyond our fair share of the market. So, this is a low single-digit business, our core legacy business. And in order to grow that to mid single-digits, we need to focus some secular [ph] growth and animal health is one of them. So, in the past we have modest sales but we see this as an opportunity so much so that we brought on as I alluded in my prepared remarks an additional executive level resource to really focus on executing in this segment. And in the early innings, we're seeing fruits of that labor. So, we are very pleased with the growth in animal health.

And would that segment get reported in just the core products as I look at your revenues?

Yes, it would.

And then, just secondly and my last question, really on J-Plasma, two parts. Are you seeing any response from your competitors yet or is it just too early because you are in the top of the first inning. And secondly, it seems to me clinically you're better than the competition and you are priced very appropriately. Are you getting any pushback from the hospital accounts or are you just priced so competitively, their just taking the price as is?

I think we have a very compelling story with J-Plasma that is resonating with really all stakeholders. And when I say all stakeholders, I mean the clinicians do view it as a superior product, as a space, one of the themes that emerge as we gain feedback from surgeon is there hasn’t been a whole lot of real innovation in the energy space for quite some time but wow! This is innovation. So that’s the theme that has emerged. So the clinical acceptance has really been unanimous. We haven’t had rejections from that front. From a hospital perspective, the economic story is also compelling. So that’s another stakeholder is hospital administration. And we feel that we price this appropriately, so that we could secure the margin the industry expects by preserving an economic story for the hospital. So, it's a real resonating full package to all stakeholders. With respect to competition, I think you're right, it’s pretty early. And what we are really replacing -- this is one of the unique situations where we have this wonderful opportunity to replace an existing gold standard that’s been around for a very long time in CO2 laser with a new gold standard. So, we haven’t seen much evidence of competitive actions from that existing gold standard of CO2 laser.

Thanks a lot guys and again congratulations on a real nice job in terms of the growth of J-Plasma and the development of this foundation. And you guys as a management team have had a number of accomplishments already in 2015. So, congratulations and keep it up. Thank you.

This concludes the question-and-answer session. I’d like to turn the call back over to Mr. Gershon and the rest of the team for any closing remarks.

Thank you everyone for participating in today's call. And we look forward to keeping you informed on the calls ahead. Thanks very much.

Today's conference has now concluded. We thank you all for attending today’s presentation. You may disconnect your lines.