Apyx Medical Corporation (APYX) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Bovie Medical Corporation Fourth Quarter and Full Year 2015 Earnings Conference Call. All participants will be in a listen-only mode. Hosting today’s call will be Mr. Robert Gershon, Chief Executive Officer of Bovie Medical Corporation. After today's presentation, there will be an opportunity to ask questions. Please also note this event is being recorded. [Operator Instructions]. Before we begin, I would like to make the following Safe Harbor statement. Today's call will relate to Bovie's fourth 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 Rob Gershon. Please go ahead.

Thank you, Amy, and thank you all for joining us this afternoon to discuss Bovie Medical's fourth quarter and full year 2015 performance and our outlook for 2016. With me today are our CFO, Jay Ewers; and our Chief Commercialization Officer, Jack McCarthy. At the conclusion of our prepared remarks, all three of us will be available to answer questions. We executed well in 2015 and ended the year with positive momentum across a broad range of operating metrics. Fourth quarter revenues increased nearly 11% from the comparable period in 2014 reflecting positive year-on-year growth in core product sales, OEM contract work and J-Plasma sales. Specifically sales of our cauteries and lighting drove increased core product revenues. Our OEM contract work benefitted from additional orders that we received towards the end of the year that will also be added in, in 2016. These developments are building upon the Bovie brand and leveraging the product development and manufacturing expertise that the company is known for, as well as enabling us to allocate significant resources to the commercialization of J-Plasma. For full year 2015, total revenues increased 6.6% to $29.5 million. Also, we have been consistently operating at a healthy gross margin, which was 42.4% in the fourth quarter and 42.5% for the full year, [emblematic] of the market's recognition of the high quality of our products. The operating metrics and leading indicators for J-Plasma product adoption were strong in the fourth quarter, but sales were below our expectations. We continue to face an exceedingly slow pace of J-Plasma generator sales. While we know that the long sales cycle for capital equipment is an industry wide issue, we also know that our VAC approval track record has been outstanding at over 92%, which makes this situation even more frustrating. On the other hand, while overall J-Plasma revenue was sequentially down from Q3 we had a 28% sequential increase in J-Plasma hand piece volume compared to third quarter levels. In fact when you adjust for a large order that shipped from Q2 to Q3, hand piece volumes sequentially increased at double digit rates in each quarter of 2015. This is the momentum that we had anticipated and expect to accelerate, and as hand piece volumes are closely tied to volumes of procedures done using J-Plasma, we have estimated that J-Plasma has been used in over 1,300 cases in 2015. Growth in hand piece volumes and the number of procedures are aligned with the leading indicators of J-Plasma adoption that we have been reporting on over the last several quarters and which have shown significant growth in this fourth quarter as well. Specifically, at the end of 2015, the number of surgeons using J-Plasma increased 14% to 151 from 132 at the end of the third quarter and was almost 5 times higher than the 32, we had at the end of 2014. The number of generators-in-use at the end of the year rose to 81, up from 62 at the end of the third quarter and 18 at the end of 2014. Scrub POs which are usually an excellent indication of orders to come, increased by 61 in the fourth quarter to reach 182 for full year 2015 compared to only six in 2014. As you can see all of these metrics are pointing in the right direction. Within this environment, we've implemented four strategies that we believe will accelerate J-Plasma adoption and significantly expand the addressable market in 2016. Broadly speaking these strategies involve; first, expanding our target markets; second, converting users of competitive plasma products; third, enhancing the value proposition for generator purchases by hospitals; and fourth, accelerating our development of distributor networks particularly for international sales. For competitive reasons, I do not want to go into tremendous detail in each of these four initiatives, but here is what I'll say. We're moving ahead to capture more business in our plastic surgery target market. J-Plasma is FDA cleared for many soft tissue plastics procedures, including breast reconstruction and wound management and while not specifically cleared, it is not contraindicated for a host of others, notably skin resurfacing or wrinkle removal. Without actively targeting this market, we've been receiving a number of orders and certain plastic surgeons have been widely marketing the benefits of the product on reducing the patient's discomfort and downtime. By mid-February, we completed the next phase of training of our entire sales organization and we've already launched a more aggressive campaign to address the plastic surgery market, which is largely office based and where decision-making is much faster and less cumbersome than the hospital environment. At the same time, we've expanded our focus in gynecology to include gynecology/oncology, where we see additional opportunities to use J-Plasma for various procedures including dysplasia, debulking, carcinomatosis and colectomies. And as we've mentioned in the past, we're working closely with members of our Medical Advisory Board, all three of them are leaders in their respective fields of urology, cardiothoracic, cardiovascular and robotic surgery. They're guiding us to identify those procedures within their specialties for which J-Plasma can become the standard of care. While it takes time for a product to gain this recognition, the surgeons on our advisory boards as well as other top surgeons are convinced that J-Plasma has the precision and safety attributes that could lead it to replace other modalities and indeed become a standard of care. In addition to increasing the opportunity for J-Plasma sales, our multi-specialty approach is likely to help us accelerate the VAC process as we have hospital based champions in several of the highest profile revenue generating specialties. This brings me to the second initiative, which is enhancing the value proposition for the hospitals. First, we are stationing reps in operating rooms, where our generators are available but not being used by surgeons on all of their procedures. In this way, we expect to significantly increase the number of hand piece sales and overall adoption and demand for J-Plasma. We have also added to our leasing program a new pay-per-use feature that includes a minimum hand piece quantity commitment. This would shift the decision from a capital equipment investment with its elongated sales cycle to an operating expense decision which has a much shorter sales cycle. The third strategy is to convert users of a competitive plasma based product. This process is underway and involves working with surgeons at large hospitals, several of whom are already using J-Plasma on a trial basis. Stay tuned for some exciting progress in this area. And the fourth thrust, is to evaluate how best to use distributor networks to broaden our reach, particularly in the international markets. This facet of J-Plasma's commercialization has been on our radar for more than a year, but recently we've experienced an uptick in requests to distribute the product to overseas markets where we already have regulatory approval. In fact, many of those requests come from existing partners of ours, who distribute Bovie branded core products overseas. To-date, we have trained 14 distributor reps in various countries on the use of J-Plasma and we expect to accelerate that program in the coming month. This should give you a good sense of the major strategies we are implementing to drive further adoption of J-Plasma. There are lots of other initiatives underway, too numerous to mention. It is important to note however that we are taking these actions while keeping close control of our expenses. Jay will speak to that in a moment. But I'm very pleased to report that the strength of our core business is enabling us to reduce the operating losses associated with J-Plasma's commercialization and our R&D activity. And while on the subject of R&D I will mention that we've launched several new products in 2015 including extensions of our J-Plasma product line and will continue to make certain customized changes to the J-Plasma hand piece configuration for its use in specific high volume procedures. At this point, I will turn the call over to our CFO, Jay Ewers, who will do a financial review of the fourth quarter and full year. Jay?

Thank you, Rob. In the fourth quarter Bovie results showed positive momentum as we execute on our strategy with double digit growth in revenue, expanded gross margin and a narrower operating loss. Importantly the strength of our core business continues to support J-Plasma's commercialization. Revenue for the quarter was $8.3 million, nearly 11% higher from $7.5 million in the year ago period. Sales were driven by the core business with a higher contribution from J-Plasma revenues at nearly $348,000 up from $73,000 a year ago. Gross margin for the period expanded to 42.4%, a substantial increase over the adjusted gross margin of 38.7% and reported gross margin of 32.7% in last year's fourth quarter. The result reflects an improved product mix including higher sales of cauteries, lighting and other products and inventory write downs in 2014 that negatively impacted margin. After achieving this substantial increase in margin, we believe the current level will be stable to slightly higher in 2016. Fourth quarter operating expenses were higher as planned rising 15% to $4.9 million as we continue to invest for growth in J-Plasma commercialization and R&D across the business. R&D expenses rose 57.3% to $626,000, driven by higher payroll costs and project spending on new J-Plasma hand piece configurations and other new product initiatives. Professional service fees of $414,000 were 25.5% higher than last year's fourth quarter, reflecting legal costs related to patent work and due diligence for our Bulgaria acquisition. Salaries and related costs were broadly flat at $1.7 million. Operating loss for the quarter narrowed to $1.4 million from $1.8 million in the year ago period, as the higher gross profit more than offset increased OpEx. Net loss attributable to common shareholders was $1.4 million or $0.05 per diluted share compared with a loss of $5.5 million or $0.39 per diluted share in the fourth quarter of 2014. Results for the year ago quarter included a non-cash gain of $2.5 million related to the mark-to-market accounting for the fair value of issued common stock purchase warrants and a non-cash charge of $6 million on the write down of a deferred tax asset. We eliminated the volatility of the mark-to-market effects of the derivative liabilities following our capital raise in Q1 of last year. Once we pass the first anniversary of that raise, investors will have a more apples-to-apples comparison of our performance. Now looking briefly at results for 2015. For the full year, total sales were up 6.6% to $29.5 million, supported by our core business and higher contribution from J-Plasma. Gross margin reached 42.5%, a jump over last year's adjusted gross margin of 40.7% and the reported gross margin of 32.5%. Our operating loss in 2015 was $7 million compared to $5.8 million in 2014, due to higher operating expenses related to Bovie's investment to commercialize J-Plasma and expand its product suite. The company reported net income of $8.4 million, or $0.24 per diluted share compared to a net loss of $18.2 million or $1.03 per diluted share last year. Our 2015 net income benefited from a gain on conversion of warrants and preferred shares of $14 million. Last year the company incurred a loss of $7.3 million from the conversion of warrants and preferred shares. I'll now comment briefly on the balance sheet. At the end of 2015, our balance sheet remains strong. We had unrestricted cash and cash equivalents of $11.8 million compared to $5.7 million at the end of 2014. Working capital was nearly $18 million and aside from the mortgage on our manufacturing facility, we have no debt. While we do see significant cash out flows in the first half of 2016, cash burn should slow in the second half and we expect the company to be cash flow neutral by the fourth quarter. In conclusion, 2015 was a year of solid financial performance. In 2016, we are positioned to deliver further revenue growth while expense growth should be limited. I'll now turn the call back to Rob for closing comments.

Thank you, Jay. To sum up this was an exciting year for Bovie Medical, one filled with accomplishments and our share of challenges. While we are not in a position to give guidance in our performance in 2016, there are certain projections we can share. First, based on our current visibility, we see continued low to mid single digit growth in our core products business and we are set for a solid bump in OEM revenues in 2016. Second, when looking at our sales pipeline and operating metrics, we expect that J-Plasma hand piece volumes will increase by more than 3 times in 2016 from 2015 levels. And third, this anticipated revenue growth plus the operating expense savings from the Bovie Bulgaria acquisition and our own focus on cost controls should enable us to breakeven cash flow by the fourth quarter of this year. Most important is that while J-Plasma adoption from a generator sales perspective has been slower than anticipated, there are no product derailers. J-Plasma works as expected when used as indicated, there have been no clinical objections or any adverse events. Clinical acceptance by surgeons and VACs has been excellent and in fact with over 92% of VACs approving unprecedented. J-Plasma meets an unmet meet and we are confident that it will become the standard of care across several specific procedures. Amy, at this point I would like to open the call to questions.

Thank you. [Operator Instructions] The first question is from Dave Turkaly at JMP Securities.

So I know in the past we talked about the sales cycle, I think being somewhere around 120 days and obviously as we have heard some similar comments on capital placement or sales in today's environment. But I am just curious could you comment on exactly any update there, how long do you think it's taken? And then I guess one is for Rob, I mean you mentioned some of the expansion into gynecology/oncology and plastic surgery. You look at this technology I would love to just get your thoughts on the overall size of the opportunity for J-Plasma, given that you are looking at some incremental areas to go into.

Yes, okay absolutely. So I’ll start and I will certainly invite Jack to chime in. So here is what we know. With the benefit of -- we are about 14 months into full commercialization, being that commercialization truly started in January of 2015. And with the benefit of that we have been able to really get our arms around how long is the sales cycle, from an empirical data perspective, how long is it, and what we found, our initial target markets have been GYN and plastics. And on the GYN side what we are finding is the sales cycle is about seven months and for the plastics it's about 60 days, so a big, big difference. Hence our emphasis in 2016 on plastics, it's simply a shorter sale cycle. With respect to the size of the market, in terms of GYN/oncology and plastics, the way we calculate the size of the market is looking at the specific procedures, the volume of those procedures and simply multiplying it by the ASP of our disposable hand pieces. And what we are doing right now -- and you have to really get these numbers, so we are working with the various societies to get the actual numbers. So I don’t have a specific number for you in those specialties. But what I can tell you at least from looking at some of the early numbers, it's a multiple of what we have established as our TAMs to begin with, especially in the plastics area. Those numbers tend to be very, very high from a procedural volume perspective.

Thanks for that. And just to sum it up any methods…

I am sorry Dave to interrupt, I am sorry. I meant to mention that as we are bedding these numbers we will update our investment presentation online and the respective TAMs accordingly. So stay tuned for that. It will absolutely be in our next iteration.

Great thank you for that, that’s helpful. And not to pin you too much on the setting, the tone in your comments sound you are even more of a believer in sort of J-Plasma and the opportunities ahead, and I just want to make sure that I am hearing that correctly. The delay that you saw or the issue you might have seen this year was a timing one, which you think you can recapture ahead, would that be fair?

Yes, absolutely, there is no question about it. At the beginning of this process we knew that we had a special product on our hands and we knew that it had significant opportunities for growth. Fast forward now, we have absolutely validated it, and that’s why I commented on no derailers. The more we learn the better the story gets. And our confidence has never been higher, there is no question. Yes, we are frustrated. We are really frustrated by this elongated sales cycle for the capital piece of equipment, but wow, are we encouraged by the growth that we see in true adoption, which is really measured by the hand piece volume and the quarter-over-quarter growth that we see there. So our confidence level has never been higher and we’re navigating and our strategy is in place to shorten that sales cycle for the capital piece.

Thank you very much.

The next question is from Charles Haff of Craig-Hallum.

Hi, thanks for taking my questions. Can you hear me okay.

Yes. We can hear you perfectly Charles.

Okay. Thanks. And wondering in terms of the new hires, I think you made some announcements there, I wondered if you could just kind of review, why you need those hires at this time and what you hope to accomplish there?

Yes, absolutely. So I’ll start and then I’ll ask Jack to chime in. So this is all about -- we slightly expanded the sales organization by adding a new regional manager and this is purely a span of control play and the opportunity to bring two highly, highly talented regional managers into our organization. In my personal experience, the regional manager role is within sales, really is the most critical of them all. They are the ones that are -- that really drive the accountability on the frontlines. And to have the opportunity to hire two exceptionally talented individuals and shrink the span of control and manage it more closely was just too good to pass up. And then of course the other hire was our marketing, our Director of Marketing. And this we considered a coup, because he is a known entity to us, having worked with some of our management team members in the past, specifically Todd Hornsby and we know his talent. So the ability to bring him into the fold was really a coup and in a very short amount of time, he has really gained the creditability within the sales organization, which I can tell you is difficult for a marketing professional to do, but wow, has he made an impact in short order. But Jack?

Yes, I’d say from both marketing and sales, they’ve got great experience in the places where we need them. The regional managers have a lot of experience in capital sales, which is really going to help us out in shrinking that sales cycle. So we’re excited about that and the insights they bring to our team there. Additionally, our Marketing Director has background and CV, which is a target procedure for us and to grow that space and [plus energy] as well. So we have really helped expand our knowledge and insight into capital in our target procedures.

Okay. And Jack could you remind us, how many sales people did you start the year with in 2015 and how many did you end the year with?

We started with 13 and three managers, which are player coaches and we ended with the same amount for the year.

Okay. And then where do you expect to end 2016 on those metrics?

In terms of the sales organization?

Yes. The number of sales people.

Yes. So here our philosophy audit. We haven’t wavered on our strategy of migrating as quickly as practical to a direct sales organization. We will continue to do that. But from a practical perspective, we need to do so responsibly and that is why we’ve been able to grow, the way we’ve been able to grow and manage our cash position as favorably as we have. So specifically, we will grow that direct sales organization, when we can do so responsibly, meaning that the sales reps become self funding in a fairly short time horizon. We don’t have a specific target in place. But we do continue to augment the direct sales force with the independent sales reps.

That’s one of the reasons we expanded the RM role to include another RM. So that we can add more independents, cover markets and still properly manage our activities. In addition, we also as Rob mentioned are adding some resources, OUS for distribution but no direct heads.

Okay. And regarding the plastics opportunity. Some of the plastic surgeons that I’ve spoken with like the fact that the J-Plasma box can be used for a few hours. And sometimes they use them for multiple procedures in the office. Is this something that is a functionality that's still holding and physicians to do multiple procedures in the plastics office with J-Plasma or have you tweaked the software, so they can only use it once per procedure?

Yes. So per the IFU, the Instructions For Use. This is a one-time use, one patient use product. Now we can't control if a surgeons opt to do things differently than that, from a compliance perspective. We can't compel surgeons to do anything but we do label it accordingly. It is certainly a consideration to build some smart technology into it, so that it is not being used beyond the instructions for use, one patient one time use. So that is a consideration for us.

Okay, so that's something that you are working on now?

Yes, it is. Because anything we can do to promote the proper and safe use of our products, we will take those necessary steps to do it and this is one step that we're investigating accordingly.

Okay and then I had a question regarding the Ultimate machine, where does that stand right now? Are you still selling that machine and how does that fit in with the core J-Plasma strategy today?

Yes. So, just as a reminder the Ultimate is the newer version of our generator which combines the highest wattage traditional or electrosurgical generator with monopolar and biopolar with J-Plasma all-in-one box. That is certainly, our strategy over time is to really migrate to the Ultimate box for all of our J-Plasma users. Now we still do so the J-Plasma only version of the generator but the demand is higher for the Ultimate.

Okay. Thank you. And one last question for me. So, the 71 VACs that you currently have approvals for, how many of those would you say are ordering each quarter? Are all 71 ordering each quarter or a portion of those?

Yes, I'd say a large portion are ordering every quarter. It's tough to break it out and I don't have that in front of me but I'd say that most of them are ordering every quarter. Whether it's a generator-in-use, where scrub POs are being used or in the valuations or VAC process.

The process is different in each hospital, we have described this a number of times, so, it's tough to say as one formula in terms of times [indiscernible].

Right, one thing, we can certainly say definitively is those customers where we have gone through the VAC process and it is approved are ordering customers. So we don't have -- we haven't gone through an elongated process and had any customers drop out as a result. So they are all ordering customers, we don't know the timing, whether it's quarterly or not. I'd certainly expect it is.

Okay. Yes, because that's the part that I'm kind of struggling a little bit with, in having 71 VAC spread, roughly $340,000 of J-Plasma sales this quarter, it isn't a really high utilization rate and I'm just wondering what is going to take to kind of get that utilization going?

Yes, and that's a very, very fair point, Charles. In our prepared remarks, I referenced one of the strategies of stationing reps where we have generators-in-use. And the reason why we're doing that, is to drive usage and what we're finding is that when a rep is in the room having the conversation with the surgeons, the adoption becomes much more routine and we're top of mind. Now there are clear clinical benefits. So for certain procedures, for top of mind no matter what. But our vision is to get these surgeons to utilize J-Plasma into all of their procedures and when the rep is in the room having conversations and sharing insights and experiences from other surgeons, we're beginning to see that traction and that's a focus for us now is to deploy the reps accordingly, so that we can drive more routine usage.

Okay, thanks and congratulations on new hires.

The next question is from Russell Cleveland of Renn Capital.

Thanks for the call and the numbers here and a comment, congratulations on all of the conversions as a preferred and I know that was a difficult thing but it cleans up the balance sheet and makes everything a lot of easier, and not having to worry about that. So congratulations on the balance sheet clean up, I think it's very, very good for last year. My question is really on the whole dermatology plastics area, it seems like a very large area. Someone commented to me, there is a lot of wrinkles in this country and I noticed that surgeons, five to six surgeons are putting out their own press release. There was one in Denver and talking about keeping them away with a laser known as J-Plasma revolutionary [cervic] laser designed by Bovie Medical. Now in your prepared remarks, you mentioned going ahead and entering this market and it is so large, would you comment more how we're going to do that? What our strategy is in the whole plastics area?

Yes, absolutely. Thanks Russell for the question and this is definitely an area between a shortened sales cycle and the positive results that our surgeons are experiencing and you can see based on their own marketing activities, which we do not condone. We can't control what surgeons do but we certainly have not branded our product with any other name at this point in time although that certainly is a consideration in the future, but our product is J-Plasma. We have not branded it as anything but that at this point in time. To enter into this market there are different approaches that we are taking. So we as immediately or I shouldn’t say immediately, back in early February as I mentioned in the prepared comments, we took our entire sales organization that is both the direct and independents through an extensive training program specifically for plastic surgery and specifically for those procedures that we have 510k clearance on. So that was the first step, we are also considering other avenues for scaling this business and for competitive reasons right now I'm going to be a little bit silent on it, but it's simply exploring just some other ways of scaling it with other distribution type arrangements. So stay tuned for the specifics. That's what I'm talking about is just a distribution channel type relationship because the plastics market is different than the traditional OR acute care setting. And what's critical to the organization as we deploy our resources is we do so efficiently. So as we expand into different areas we don’t want that expansion to detract from the acute care setting. So we are investigating channel partners just to make sense, makes all the sense in the world. So that's another way of scaling this opportunity and you are right, Russell, the numbers are very, very large and that's why we are continuing to [vet] it out and pursue that as a significant growth area for all the right reasons. The product performs well, the sale cycle is shorter and we are prepared to leverage those opportunities.

Last question is on J-Plasma particularly the hand piece volume we are getting numbers every quarter which is a long time. Is there any thought about having new numbers come out sooner so we can see the progress that has been made and the whole hand piece volume seems to be the key to the use of this. Any thoughts on that?

There is no question about it, the hand piece volume is a very accurate parameter for the adoption of the products. Now in the early innings of commercialization, which I re-characterize as the first two years, those volumes can be lumpy and looking at them on a monthly basis or biweekly basis -- of course we look at it on a daily basis, but to report on them that frequently may not pick the most accurate picture of the adoption. We will be reporting them on a quarterly basis because that is enough of a time horizon for looking at significant trends. So we put that out as a new metric this quarter for the first time and we will continue reporting on it.

Great, okay. Thank you so much.

The next question is from Jeff Bernstein at Cohen Prime Advisors.

Hi, guys. Thanks for taking my questions. Just a couple. Can you talk a little bit more about the new leasing model you are considering in that CapEx versus OpEx kind of decision and how important you think that is?

Yes, absolutely. So I'll start by giving you the context why did we do this. We have a program and several manufactures that sell capital equipment and disposable hand pieces have a similar program that's a pay-per-use program. And what that means is we will place a generator at a hospital and the customer will pay us every time they use the generator. Well how do they do it, that every time they order a hand piece there is an up charge for the hand piece so that's your pay-per-use. Those are very common programs, many manufacturers have implemented through them. Where we at Bovie got a little bit more creative and started thinking outside the box is with some of our leasing company partners, and we have a new leasing program that we launched already that takes this concept of pay-per-use and transitions it to the leasing company. So in this situation the leasing company would actually purchase the generator outright so we of course get the revenue and recognize the revenue immediately or approximately and then the pay-per-use component of it actually goes through the leasing company and not through us. So it's just one more way or one more option to provide our customers to shorten their cycle to bring the product into their ORs. A lot of our customers, especially the surgeons are just as frustrated as we are in terms of how long it takes to get the product in. If the demand is there, there is no question about it. But the process that they have to go through is just [torturous] for so many that are involved. So as we launch these types of programs they are really welcomed by the hospitals because all of a sudden it does bypass their capital process and it just goes to their expenses.

So at this point it's really not the VAC approvals as much as the capital process that's frustrating to you?

Yes, it's actually a combination of both and again it's different for every single hospital and single system. And as Rob mentioned earlier, we are competing with other capital priorities. One in particular is one that everyone on the phone probably knows [indiscernible] devices, EMR all hospitals are required now to make large investments in EMR and that’s a huge capital component for the last couple of years for every single hospital out there.

Yes, and that’s kind of an insight. I am sure you have seen it as well. Electronic Medical Records or EMR is just a reality that every single hospital has to contend with. So all of a sudden here we are medical devices for a relatively small spend on a generator, we are competing with EMRs that’s a challenge, that is a challenge. But it's a challenge for everybody.

Got you. And then could you give us an update on what's going on with GPOs and how that’s helping if it is?

Jeff you broke up for a second, did you say scrub POs?

No, no GPOs or the Group Purchasing Organizations?

GPOs yes, so Jack why don’t you provide the update, because we have grown our GPO strategy.

Yes, we have three contracts in place right now. One with Intalere which is the former Amerinet organization they have rebranded, that’s for J-Plasma and we have success there early on. We recently signed a smaller region GPO agreement in the Georgia and Florida marketplace and that’s really more focused on the core business but still very helpful for us. And then most recent win in GPOs is MedAssets and that’s a great win for the organization because that is a win for both the core business and J-Plasma business. So it impacts all generators and all accessories across a large network of hospitals, so we are very excited about the new MedAssets agreement.

And so what does that do for you exactly? Does that short circuit anything in terms of the process or is it just a kind of give a discount and give you some product placement with the GPOs or how should we think about that?

It does a couple of things. First of all it gives us access. A lot of times we are shut out of a hospital unless you call that GPO agreement, so that’s one. It also -- we are ensuring a sales cycle a little in that will have pre-negotiated terms and pricing going in there. But it's not an automatic, it's a right to hunt. It does give you those benefits up front of access and again the pricing and terms and agreements are already in place.

Terrific. And then I had one for Jay. You have talked about potential to improve the supply chain in assets turns, can we get a little update on what's going on there?

Sure, so we -- as you know we bought Bovie Bulgaria in Q3 of last year and we are leveraging that for the lower cost structures in Bulgaria, is one area. As we ramp, we are leveraging our economies of scale in purchasing. And of course we are -- the other area where we are focusing on is continuous improvement in our production methodologies et cetera. Those areas we see significant improvement. And we also -- and I forgot to mention the suppliers in China et cetera.

So, will it be in the second half of the year that we will see asset turns kind of pick up, I didn’t do the calculations for this quarter on inventory? Looked like inventory didn’t change very much sequentially. When do you expect to kind of get some traction?

Towards the second half. Inventories did increase a bit in Q4, it did go up. But that’s related to the new product launches that we have upcoming and ramping for those and we do expect to see better inventory and asset turns in the second half of '16.

Great, and then lastly Rob, I think you guys have talked about another new product that has not been described at some point soon, can you just give us an update on that?

Yes, there is no real update on it and that is true. Our commitment and promise has always been as we build the direct sales force, we will increase the number of products in their bag. We did not build this infrastructure to be, what I just call, a one trick pony and sell J-Plasma. We will launch additional products, both organically and we have so much inbound in just to access this talented sales organization. We certainly consider those other products. But the one that we want to launch organically is really an issue of -- a self-inflicted issue of timing. We want to ensure that nothing distracts us from growing J-Plasma as quickly as we possibly we can. So it really is a timing issue for when we add an additional product to the bag. So we will update. We don’t have a specific update on it, as we continue to execute our commercialization plan for J-Plasma, but as soon as we do, we will certainly amplify that strategy and product launch accordingly.

Great. Makes sense. Thanks very much guys.

The next question is from [indiscernible].

Thanks for taking my call. Actually I got a couple. On the leasing program do you have a carrier that generate on your books, is it always formed up to the leasing company? And at the per fee -- per use fee is going to the leasing company. Does that mean that you will always still get a piece of the hand piece or do you give that up by running that through the leasing company?

Yes. So the generator -- title transfers to the leasing company on the generator it is structured so that we recognize it is as a sale and as time of shipment. And as far as the hand pieces, it depends on the leasing program. If it’s an up charge, we see a piece of that, actually on both we see a piece of it, [one] more than other, but we do retain a piece of the upside on the hand piece increased selling price.

Okay. And that’s in perpetuity for ever then?

Correct.

Okay. And then the other thing, on trying to convert users of the competitive plasma product. I’ve been in Bowie for a long time, I wasn’t even aware there was a competitor product. But if you could just kind of expand on that a little bit. What do you think your benefit is or benefit there is to J-Plasma versus this competing product and how you’re going to start converting?

Yes. I’ll start and I’ll turn it over to Jack to kind of compare and contrast. But without getting into specifics for competitive reasons obviously, specific names of which companies we are going after. The category is argon plasma versus helium plasma. So Jack, if you could kind of just talk about some of the differences and why that makes sense and why it’s really, really resonating.

Yes. A couple of things. Some of the features that we are selling inherit benefits helium versus argon in the way that our technology is ionized and the way that our technology actually cools the tissue around a tissue to get you better tissue effect than you get with a argon. Argon is a lot hotter, so there is a lot more damage, total damage to surrounding tissue. All product also has a knife blade, allows surgeons to cut excess tissue, which is in advantage of other products out there. So there is a lot of different clinical benefits, you get from our product that the surgeons are recognizing in the hospital right now.

Okay, great. It sounds like argon is kind of like lead or it’s a lot hotter and in other words the helium is cooler. So now that’s it for me. Thanks.

The next question is from Glen Rudiger at Trust Management.

Hi guys. I’d like to give me a little more clarification on Bovie Bulgaria. Looks like it ups your employment rate by about 20% or 25% and what are you expecting to get up to there and what did we really pay for it? Did we pay in stock or cash, because the balance sheet as of the end of the year looks almost the same?

So, hi Glen, thank you for the question. Yes, we did increase heads when we acquired Bovie Bulgaria. That’s a combination of both technical engineering and manufacturing folks, administratively no impact whatsoever, particularly from a headcount basis. It was all in the manufacturing and technical resources. As far as how we paid for it, it was about a $0.5 million and there is a $140,000 note payable that’s doing five years. Simply put, we got Bovie Bulgaria at a bargain as we [candidate].

Yes. And just as a reminder Bovie Bulgaria has been a contracted facility to us exclusively and we allowed it to use the name in the past for 16 years. So from a balance sheet perspective, we covered those expenses as a contract facility.

So you didn’t have a lot of surprises coming.

No.

No.

That was one of the benefits of buying Bovie Bulgaria.

The other question I have is Craig-Hallum was -- now it’s exactly a year since they did the deal our stock's been cut in half and they said they were going to be putting those stock and [term amount]. What you’re feeling about the job they did?

When you take a step back, we win into a capital raise process and came out of it with a fully subscribed raise and an exercise of greenshoe option and with that as a result we were quite pleased. It's hard to speculate beyond that on how much of the performance of the stock is related to those activities. There are so many market dynamics that the investment community that's on the phone could probably speculate better than we can. But in terms of not only having a fully subscribed raise and an exercise with an greenshoe option, we also had the goal of institutionalizing our shareholder base a little bit more and with that we certainly have terrific investors that came into the stock, some of whom are on this call now that were new to Bovie. So with that, we've been very pleased.

I think the biggest advantage we got was the cleanup of the balance sheet and all warrants and the preferreds getting a ways out, that was a big advantage, but it is kind of frustrating to watch the stock go the opposite direction.

Yes. There is no question about it and we're certainly frustrated. We're absolutely frustrated by the stock performance. Our commitment to our shareholders is to keep our heads down, executing our strategy and grow this business to its potential and continue to scale and allow the market to react accordingly.

Does it look like -- with your guidelines, looks like J-Plasma was about 4% of our business last year, according to what I'm looking at it, looks like it should be about 12% next year. Is that a reasonable expectation?

Glen, yes, it was 4% of our business in 2015. We expect it to be...

Yes. It will go up, there is no question that over time J-Plasma will become a higher and higher percentage of the overall business. We do expect the overall business as I mentioned in the prepared comments to grow on all three aspects of the business, the core, the OEM and J-Plasma and it should be a much higher percentage, then for next year.

The next question is from Rob Romanoff at SunTrust Bank.

How many generators were sold in the fourth quarter?

Yes. We don't breakdown sales by generators and hand pieces. The metric that we do report is the number of generators in use which grew to 81 in the fourth quarter, I think from 61 or so or don't quote me on it I think I just have it in my prepared remarks, I can look. But we don't breakdown specifically how many were sold -- it went from 62 to 81 quarter-over-quarter.

Okay, good. I am trying to get our my hands around the sequential decline in J-Plasma sales. I definitely didn’t see this coming and I believe you're fairly optimistic throughout the quarter in some of the conference calls and some of the investment conferences you were at.

So what it is without question, what is it, is the generators, the capital piece, the capital component of the sale with this elongated sales cycle is why it was sequentially down and that is the impetus for us to share with the investment community what we believe is the most important barometer for adoption and that is the hand pieces. I guess when you think about it, the generator ASP is north of $20,000, the hand piece ASP is $375. So theoretically, you could see sequential increases in revenue that's tied to a big generator purchase, but if you saw simultaneously a sequential decrease in hand pieces that would be problematic. That will tell you that adoption is going in the wrong direction. So we think it's more important for assessing the adoption of J-Plasma to focus on those hand pieces sales and watch it growth, because...

And I would agree, but if you are not selling generators, you're definitely not selling hand pieces then.

Yes. So that's not necessarily the case, because of the pay-per-use program that we have, where we will place the generator without charging a penny as long as they pay every time they use it through the up charge of our hand pieces. In addition to that, another metric that we report on is the scrub POs and we think that's another strong indicator of sales to come because surgeons are willing to go back with scrub POs and that will only pick that barrel as they wait for the capital piece sales process to come to its completion.

You made a comment that the demand is there but I just kind of wondered if there was something else going on other than the slow sales cycle, that's causing the slow uptick here?

For us, in our view, it's really two things. It is the sales cycle -- in our mind, there is no question about it. It is the sales cycle and one thing that we have not made significant investments in, which we are now, is in marketing and creating more broad based awareness and pent up demand in the marketplace for this product. Now bringing Jeff Hoffman on Board as we announced is a big step in that direction. Now we have spent on marketing, make no mistake about it, we have put together from a marketing perspective mostly sales collateral material because that was lacking. So we needed to prioritize our spend accordingly. But now having Jeff on board and he is building out his team and having a marketing plan that we're beginning to execute right away we expect that to further drive awareness and demand for the product.

Okay. How are J-Plasma sales trending in the first quarter?

So the momentum continues to build and we'll be reporting those numbers of course after the quarter closes. But we've been very pleased with the level of sales activity which is tied right to our sales pipeline and the things that are coming across the finish line. So the momentum continues to build and we certainly expect to report certainly sequential growth quarter-over-quarter.

Okay. I know you are buyers of the stock back at the end of December, some of your other executives were back at these levels again. Just wondering what your thoughts are on the stock price at this level?

It is so hard for us to speculate. We certainly are very, very bullish on what it is we're doing and our Board and me personally, we do not suggest, emphasize, encourage or actually even discuss buying shares, we just don't, it's not part of our culture. So this was a 100% voluntary. We watched the stock price. We think it's -- personally, we believe that it was undervalued and we personally made investments and again our Board never talks about it, never encourages that and as a management team neither do I and we just felt very strongly. So we're not happy with the performance. We're surprised, but we're very confident and we believe our future is very, very bright. And I'll tell you one of the major reason as I indicated in the prepared remarks is we've had no product derailers and I've launched -- I've been responsible for launching a lot of products in my career and typically run into a few of them. You run into a few issues that slows down the progress, sometime it stalls to the point where you have to remove the product from the marketplace and none of that is happening at all and that's why we remain very, very bullish on our prospects.

All right, thank you. One last question, do you have an estimate -- what was your estimate to size the plastic market surgeons?

We're getting -- we're going to revise our total addressable market and as we do we will break them down by specialty and specifically by procedure. So you will see it in the updated investor deck on our Boviemed.com website under the Investor Relations tab. So the current TAM that we have in plastics which is very focused, so it's not the expanded TAM that I discussed in the prepared comments and in the Q&A. But that part of the TAM was much smaller, it was -- that TAM was $165 million in the U.S. alone, but it was just for a couple of procedures. So stay tuned, we're going to update that and we'll put it out on our website accordingly.

All right. Thank you very for much for taking my questions.

The next question is from Tom McGuire at Private Investor.

My questions have mainly been asked but just one question is, you do grade in terms of the acceptance rate on the VACs but -- and I realize no one hits a 1,000 but what are some of the reasons hospitals give you when they don’t pass you few or accept you?

Yes, great question. By and large, so we've had a handful. So less than 10, significantly less than 10 actually. We've got a handful and the most common reason is lack of clinical studies and what they say is this is just to check the box, do you have the clinical studies, you have those prospective randomize multisite clinical studies that take years to establish, and the answer is no. What we have are white papers, which are experience papers and in the early stages of commercialization that's all you can have. Having said that we are pursuing clinical papers now and they will take some time, but we are pursuing them. So the rejections have been by and large can't check the box of clinical papers we just have to say -- we just have to reject it. It has nothing to do with your product, but it's just a criteria and you don’t have it.

Okay, thanks. Then one other one, regarding the scrub POs, how does that actually work? Do you bring a generator into a hospital for a physician to use it and then does it go back out or does it stay there a while and he uses it for many patients there or what -- how this that exactly work?

Yes. So it varies. It varies by the usage of the surgeon. So if a surgeon is doing high volume number of procedures we will leave the generator, we will leave it for as long as the scrub POs are coming in. For other surgeons the sales rep is literally bringing it in for that specific case.

Okay. And VAC is a pretty significant precursor to hospital placement would you say?

Yes, it is. It's a stronger buying signal as you'll get, because surgeons -- scrub POs is almost a throwback to a different era, where you don’t hear many companies that are able to secure scrub POs and hospitals know this. And when a surgeon goes to battle to the point where they are actually requesting these scrub POs that actually makes the decision making process of the VACs easier, to say no, that this one is very important to the surgeon and it's a product that the surgeon is really, really going to back for.

Okay. Thanks very much gentlemen.

The next question comes from Bill Chapman of Morgan Stanley.

Good afternoon. Jack can I ask you on 1099 external salesman, what are their numbers out right now?

23.

You mentioned -- someone mentioned that the emphasis on recruiting more 1099 guys, do you see that going maybe 50 to 100 or give me what's your thoughts are on this?

We don’t have a specific number. We are going to cover geographies as demand dictates. So where we have openings we are actively looking right now. We are in discussions with a few reps or a few groups right now. So that number will grow. I don’t know whether we are growing that, but it's certain we are going to grow it from where it is right now.

Okay. The reason I ask you as we have got over 3,000 OB/GYNs and about 400 GYN surgery-only surgeons and it's just hard to see how you guys go really capture that market, since you clearly have intermediate roles as you are filling the substantial void and I would still be [indiscernible] to kind of we see how we are going to actually get to this market with such a fast number of physicians? Please comment on it.

Yes, sure. One of the things we have done and we have commented on this before is our targeting is a lot better. We have procedural data that will identify the number of procedures by hospital, by surgeon. So we are looking for the high volume, high value targets. That's one way to go after the market. But clearly we are going to add additional resources as we just talked about.

And Bill you are exactly right. In order to get to the numbers that we certainly want to get to we have to expand our footprint and we have to do so responsibly and we do want to have an all direct sales force over time. But in the interim period as we expand our footprint we must do so going with this hybrid model of independents with the directs. And I don’t know if we mentioned this earlier but the three regional managers that we have now, the one that was here -- that's been here for a little bit and the two that we added have very deep experience in managing a hybrid sales organization. And that again was why it was fully attractive now to bring both of these individuals on board. So we have to expand that footprint no question about it.

No I understand. You are crawling before you can run and you are trying to keep the burn rate down. That's a -- I can understand that. Have you ever thought about selling some of the other assets you got in the core business, for example the cauteries and that's something that could be sold at a nice premium. I know we do have the cash flow, but it gives us more capital to get more sales money and sort of the burn rate to again more aggressively go after this market. Any comments on that please?

So we view the core business as integral, as an integral advantage to the commercialization of J-Plasma, because the core business is steady, stable and it covers our fixed costs of the business and allows -- and slows our burn rate for the commercialization of J-Plasma. So selling off components of that core business, we think will weaken the overall strategy.

Okay, well let me ask you two, Rob, I saw a FDA filing of Dr. Patel's lympho study on the reduction of the lymphoceles and is this trial starting?

It is not yet started. So I believe what you are referring to is on clinicaltrials.gov. If you search under Bovie and Dr. Patel, you will see a study. And you will see a specific study protocol. That study has not yet started. We are still awaiting IRB approval at his hospital. So I think that's totally out of our control. So they go through a process that has to be approved but certainly we inch closer and closer everyday and certainly -- and really chopping at the bit for that clinical study to start.

Yes that’s exciting. And how about initiating clinical trials involving lymphedema? Is there any possibility there?

So with respect to lymphedema depending on what part of the body they are dropping on it, it's all about the drain of the lymph node system. So with this incidence in thoracic, this incidence in breast and just about any time you deal with any type of cancer procedure, you are going to be working on a lymphatic system. So we going to focus on this one initially and then we have certainly have them in [indiscernible] looking to do additional studies and we make those white papers on different procedures and different anatomy related to the lymphatic system. But it's certainly something that we are looking at as -- not as a clinical strategy but an economic strategy as well, because we believe that in addition to the clinical benefits, if we can reduce lymph drain and complication associated with lymph drain that we could take costs out of healthcare system and have another benefit as to J-Plasma in addition to clinical benefits.

Okay. Is there anything you can comment on wound care using J-Plasma?

Sure. We are through the plastic surgery initiative chronic wound care is a place that we are focused on particularly in the acute care space, the diabetic market's a huge market, there is a lot of chronic care associated with diabetes. So we are seeing some uptick in that, right now in the hospital space, we are excited about that. We don’t have a lot to report yet, it is a fairly new initiative for us. But we still have a white paper out on our website related to debridement and debridement is basically wound care and if you read that paper there are some benefits associated with it. And again we can pursue economics around that down the road as well.

Okay guys, thanks for the updating.

Our next question is from [indiscernible].

Hi, my question has to do with some comments that you made in the second and third quarter calls about what are your expectations were for how much each generator would be used by the surgeons? And the thing that I don’t understand is how the total dollars from the third quarter to the fourth quarter could go down with the increase in generator sales unless the number of surgeries that you are expecting haven't come anywhere close to what you said in those calls? Can you comment on that?

Absolutely. So thanks for the question, it's a very fair question. And what you are obviously referring to is we had a modeling assumption that I had commented on publically, in numerous forums that we expect for each generator in use for it to be used four times a week. Whether that’s one surgeon using it four times or two surgeons using it two times each, that is the way we have been thinking about the business, how the way we have been modeling our assumptions internally and we thought that was a pretty fair estimate to share publically. So the reality is the numbers don’t add up quite yet. Now there is a ramp up period, but what we are finding is either with the generators in use they are not being utilized as often as they can be, by surgeons and that’s why we commented this time during our prepared remarks that we are stationing reps with those generators to really push the usage, so that it's becomes routine. And what's simply happening is surgeons make a cost benefit decision every time they use this product. And while the clinical efficacy is without question there and very significant, they always have to balance, do I open up this $375 hand piece. And most times when there is a rep in the room, they tell it’s a no-brainer because they are in conversation and they realize the benefits of opening it and its easy. When the rep isn't in the room sometimes the surgeon will just decide not to use it. Now this does not reflect any clinical efficacy whatsoever, because the clinical benefits are absolutely clear. What it does reflect is just the routine usage and we want this to become top of my routine for every procedure, because really the patients benefit far outweighs any costs associated with it or the costs associated with it. So for us we just wanted it to become more of a reflex and more routine to use it and we fully expect that that assumption of four cases per week per generator in use will absolutely come to fruition. But it does require more rep presence in the room and that’s why we have made that shift and we’re starting to see in the early parts here of 2016, we’re starting to see the fruits of our labor.

Okay. Thank you very much.

The next question comes from Mohammed Ibrahim, Private Investor.

Hi. Mohammed speaking. Thank you for taking my question. And congratulations on making the balance sheet clean. I had one question, I had most of the questions answered. I have one question on robotic surgery. How is J-Plasma playing out on robotic surgery? Any comments on that?

Yes, yes. Great question. There is no doubt that J-Plasma has a significant contribution to make within robotic surgery. And it’s not a coincidence that our Medical Advisory Board consists of three of the most prominent robotic surgeons in the world. Currently the product is being used in robotic surgery through the ancillary port in its current configuration. Now the current configuration of the product is not optimized for robotic surgery. So the robotic surgeons that have been using it, are using it with patience and are utilizing it. Now, we did mention last -- during the last call that we have a new instrument that we will be launching called the J-Plasma Precise 360. Now this version will still be used in the ancillary port of the robot, but it will be able to be used much more easily. So we expect the adoption to grow a little bit there. But we’ve also commented publicly not so much on the earnings calls but at various conferences that we are absolutely going to launch configurations that are specifically designed for the robot. So we have not put a timeline out yet for that. But do know that that is a very, very high priority initiative that we are devoted to.

Thank you, Rob. I appreciate that.

Yes. My pleasure.

At this time, we show no further questions.

Okay, all right. So closing comments, Amy. Is that it?

Yes. Would you like to proceed?

Sure. So I just want to thank everyone for participating in today’s call. And we look forward -- we really appreciate the amount of questions that were asked. And we look forward to keeping you informed on our growth.

This concludes the conference. Thank you for attending today’s presentation. You may now disconnect.